Episode 79: Opportunities in Mid-market Multifamily Ft Bob Hansen

Bob Hansen, Principal at Second Nature, joins host Bob Preston to discuss the mid-market multifamily rental sector and its challenges and opportunities. He highlights the importance of attracting renters through amenities and value-added services. Bob also discusses the impact of economic factors on rental rates and the challenges tenants face in affording rent. He emphasizes the need for property managers to focus on the resident experience and leverage technology to meet the younger generation’s expectations. Listen in as  Bob Preston and Bob Hansen unpack the mid-market multifamily sector and the opportunities for property managers to grow their portfolios.

Bob Preston  01:05
Bob, welcome to Property Management Brainstorm. How are you today?

Bob Hansen 02:41
I'm good, Bob. Thanks for having me.

Bob Preston  03:41
I always start the show by learning more about my guests. Now I know you pretty well. I've explored your background, which is super, super interesting. And you have a lot of experience coming up through the ranks in several different companies, not only in SFR but also in multifamily. So I'm interested in hearing from you and hearing your story. So, can you introduce yourself and describe your background and role at Second Nature?

Bob Hansen 03:07
Sure, Bob Hanson, I'm a principal at Second Nature, working more with the multi-family. It got started in the single-family space. So I've been here about five years, and as we've grown, I'm just trying to get into some other markets. But my background is, you mentioned, Bob, you have about 20 plus years of real estate experience, ebbing and flowing from single-family to multi-family back to single-family, both on the vendor side.

Bob Preston  03:41
Sounds like a great run. And it's an excellent place to start the conversation because we'll talk mainly about mid-market multifamily today. Can you give us a quick overview of the mid-market segment from your perspective and help us understand what we're referring to in that regard?

Bob Hansen 03:58
We look at the mid-market at around 2000 units under management, about 12,500 doors. You know, for me, and with our product, talking to more of like Class B, C operators, a lot of garden style communities, maybe more scattered site. We may have a two-unit here, a 12-unit there, a 40-unit, and a 120-unit over there. That's the mid-market. 

Bob Preston  04:35
Okay, so what's the target demographic for mid-market rentals? Who are these properties geared at? Who comprises the tenant base? And what is the most essential thing in attracting renters to that type of property?

Bob Hansen 04:48
People rent for various reasons, including location, price, or amenities. I think, like in class B, C, mid-market, you're going to find someone, you know, I wouldn't say maybe a more blue-collar, right? The cost comes into play, as well as the location for many of those folks where they're renting from. You know, often in some of these communities, right? There are fewer developments in Class B and C property than in Class A. You know, you've seen the Class A properties and all these amenities from, you know, rooftop pools to golf simulators to dog walk. I've seen some wine cellars go into that, which I'm sure is a Californian, right? The wine cellar is always lovely for folks out there. But the Class B and C properties sometimes developed 30 or 40 years ago. They may have the old basketball hoop and a grill out there, but there are few amenities to help attract the tenant. And that's really where Second Nature comes in handy because the things that we're doing drive a lot of value, but it's not necessarily through an on-site amenity that they get to go to, if that makes sense.

Bob Preston  05:58
So, in most markets today, there are housing shortages everywhere, regardless of your region throughout the country. Real estate prices are rising, as are the mortgage rates. So, this is having an impact on the rental housing market as well. So, do you see any unique factors shaping demand for mid-market rental units out there?

Bob Hansen 06:31
You know, we are. From conversations across the country, things are tightening up, like getting more tenants in the door. People are sitting on more vacancies today than around this time of year. Things came to a halt or slowed down, you know, after October. So November slowed down, December the holidays, traditionally slower with move-ins, but occupancy tends to be down slightly more today than in the past. Many economic factors face the country, with few new people moving into a rental.

Bob Preston 07:06
Do you think that people are just afraid to move because they may see higher rents out there, or maybe, as you said, the economic factors are discouraging them? It's time to hunker down. And not do anything. Let's not make any changes. Let's get through the next six months to a year and see where the economy goes. Is that what's going on out there, do you believe?

 Bob Hansen 07:25

Yeah, there's a good portion of that. People stay and put, waiting to see, right? What's going to happen? Are interest rates going to change? Are we going to have this recession that people, right, we're in a downturn, but not in a recession? People are talking about when the recession is coming. Is it not coming? If you saw the market last week, it's a 52-week high, so I don't know. I'm feeling good about where things are going, but some people might say, hey, I'm not going to take that step; I'm just going to renew for another year. I will keep living in my parents' household because they're not charging me anything, Bob. I'll pick up some groceries here or there. Some people are sitting on the sidelines, and that's probably a cause for what's happened in the market recently.

Bob Preston 08:06 

People have been projecting a forthcoming recession for several years; it never seems to happen. So, all right, so supply and demand is a factor. What's going on in mid-market housing? Do you see any changes on the horizon?

Bob Hansen 08:21
You know, I see a little change. Many of the developments I'm seeing are more of the large, 300-unit class A, where a lot of money flows. I mean, indeed, there are some developments. There are some companies across the Midwest. I know they're developing, you know, 100- 120 unit buildings that do play into mid-market, but I see the larger community, the class A, which is where a lot of that money is being spent these days on construction.

Bob Preston 08:48
Okay, so I was preparing for this episode, and I got on the internet; according to Zillow, rental rates in multifamily have been flat, maybe even gone down over the last 18 months; Zillow's saying that they've stabilized for about a year, maybe. This is due to new construction; new units have flattened rental rates. They're saying now that it seems the rents are back on the rise as of late, but you're seeing something different. You and I were chatting before we started the episode today. What do you see in terms of rent rates in the mid-market multifamily?

Bob Hansen 09:24

I see some concessions come into play. I'm seeing pricing remaining flat. Sometimes a few extra enticing, hey, get them on free to move in, is what I've seen in the conversations I've been having with folks. 

Bob Preston 09:42

Okay, okay. Yeah, that's what you indicated. Hey, there's still a lot of vacancies out there. So, the rents will only rise if vacancy remains and the market is fully saturated.

Bob Hansen 09:53
Yeah, the other thing, like I was just at a, I'm here in Chicago, and I was at the Chicago 2024 preview, and rents were increased like over 30% just over the last couple of years, you know, and so the fact that things are flat, right? They're still, they're still at an all-time high. And they're still getting good if you're an owner-operator. But yeah, we're seeing rents, especially in many countries. I've had Midwest recently, and I'm seeing things to be slightly flatter these days.

Bob Preston 10:21
Well, what you're saying is similar to what's going on in the SFR market. You know, vacancies are on the market longer, and the rents have flattened and stabilized. And so it could be, as you mentioned, that, hey, you know, just like the stock market's been correcting, except for, you know, maybe the last month before that, there was a stock market correction. There may be a correction going on in the rental market as well.

Bob Hansen 10:43
For sure, I'd agree with that.

Bob Preston 10:45
Overall, affordability in this segment, mid-market, class B, and class C, has to be challenging for many of these tenants. Are you seeing any challenges in tenants' ability to make rent? And what are they facing in that mid-market segment?

Bob Hansen 11:02
You know, and on our end, because we play in that space of rewarding tenants for paying on time and credit building and whatnot. People are still doing an excellent job of delivering the rent. What I do hear from operators is, you know, they want to be aware of pushing rents and bringing in new products, right? They do feel like tenants are sensitive to any increase in pricing. There's just a lot more eyes on it. The government is having some impact on that. A lot of conversation around what you're charging for, say valet trash coming into your community or people making a profit off of things. The RUBs talk out in Colorado, California, and some other markets. There's more eyes on it. And so as long as you're an operator striving for value, like real substantial value, there are opportunities to raise some rents and do different things. If you haven't been driving the value, you will be more conscientious of your actions.

Bob Preston 12:03
And when you're talking about rubs, what are you referring to?

Bob Hansen 12:06
For example, someone offering a, you know, the rubs conversations like in Minneapolis where you're charging a fee for something, but the value behind that fee doesn't represent the cost you're setting a tenant. And so some state and local governments are trying to dive into that to ensure that if a tenant's paying for something that costs is what they'd have to pay in the open market or less to drive value.

Bob Preston 12:37
Okay, let's shift over to the investor side slightly. The operator is the person who's the owner. And, you know, operating these types of buildings, there's gotta be many, many challenges to being profitable in this arena, in this particular segment. What issues do you see in keeping properties performing at the right level? And that is what these owner-operators are looking for. For Second Nature, when they come to you to help them get their property performance, you know, at full efficiency and total profitability.

Bob Hansen 13:13
Yeah, that's a great question, Bob. I'll go back to before I joined Second Nature at Home Partners America; we were looking for ways to reduce the cost per home to manage it. One of those things was HVAC, right? HVAC repairs and maintenance. A leading driver, probably for a lot of operators, right? Why does that happen? Well, many folks don't change an air filter out or know that they even have to change an air filter out. We have employees on our staff that I've learned, and they've worked for me in other places. It's like, I don't have an HVAC here. I don't even need a filter. I'm like, do you have central air? And, oh yeah, I do. I'm like, you have a filter. After living in a home that looked like a pet for a few years, we found that person's filter, right? And now they're breathing clean air and have a good airflow. But yeah, mitigating those costs, we play a significant role for an operator. It just comes to like,

 It is changing your air filters on time all the time and ensuring that you're using the correct air filter. I found, especially in multifamily, a couple of things on using an inexpensive $1 fiberglass filter, which I was on a call earlier with someone today. Please explain what that affordable is. Like, what does it do? I'm like, well, what it does is it catches rocks, right, and that's about it. Everything else flows right through. Yes, It's got excellent airflow.

But you're not protecting your HVAC system. And I think in multifamily, whether it's mid-market or more significant, there used to be a lot of deals being done to where if you're an operator, you could put in a dollar filter versus getting an excellent couple dollar filter that protects your system because you are going to be flipping that or selling that community within a three to five year period. Now, with the market the way it is and interest rates where they are,

People are making more money just by putting their money in a money market versus trying to get an excellent yield out of the community. They were not worried about air filtration because it usually kicked the can down the road. Today, you're holding on to properties much longer, so people are considering capex costs. So, by changing an air filter and doing it regularly, you will get a five- to seven-year run out of your systems. And so that's where we're trying to play into and help them—also, significant energy savings for the building and the tenants themselves.

Bob Preston 15:37
Well, that's what I was going to ask. In some mid-market multifamily, are the HVAC systems centralized versus the individual units? Or do you find that most have HVAC systems particular to each team?

Bob Hansen 15:54
It's about 80-20, maybe 75-25, where most are in the tenants unit. And what's happened for years is, one, there needs to be more oversight on it, or two, you're asking someone on your maintenance staff to change that. And that's where multifamily kind of, right? The thought of having an operator change it out for you makes sense.

When you have on-site maintenance in your community, scattered sites, and the two-unit building and the 12-unit building, to get someone to drive around, the time and effort and the cost it takes to do that need to be revised. From a management perspective, more oversight must be needed to ensure it gets done. You're just relying on your technician. And while there are a lot of great technicians out there, there's always one or two that might not be doing it, which will cost you some money. So, the idea of changing the thought of how to manage that.

And then, like with us, we could ship it individually to a tenant for them to respond and have the response for changing that out, right? Or we can bulk import it to the community, and their staff could do it. But flipping that a little bit, making the tenant responsible, putting a date stamp on it, and ensuring it's in the lease, right? It tends to make a better system and reduce HVAC work orders.

APM Help Midroll Commercial  17:20

Bob Preston 18:20
Hey, we've talked about occupancy rates, the rental rates and where they are, whether they are flat, down, going up, and all these things. But keeping people in place in this market would be of immense importance to the owners and investors in these buildings, right? So, versus a regular or higher turnover. Optimizing the occupancy is a big deal, particularly in this market. That's got to be another significant priority for these investors and property owners.

Bob Hansen 18:55
Yeah, 100%. When you used to be able to turn a community and put a new tenant in, that was paying $100 to $200 more a month, right? That was great. But now, with the market the way it is, people need to move and get the rents you might want to push for. Suitable? Keeping those tenants in is critical; you want to avoid that $2,500 turn cost and then rent the place out for less, right? 

Bob Preston 19:20
Have it sit vacant for months or whatever happens in that region. Okay, what amenities and features can be found today in the mid-market sector, and what is Second Nature doing to help bolster that?

Bob Hansen 19:34
Yeah, there's a better focus today on the resident experience. That's the world we're trying to play into. You know, how do you keep a tenant in the community longer? As I do talk through, even just the filter component, right? For example, when I put my hat on as an operator, it was mold; it was HVAC that people get most excited about. Many of those things are caused by the tenant, but they want to blame the property manager. Right. So, the HVAC program that we have indeed.

It helps out in that by mitigating. We've done a study proving a 38% reduction in HVAC work orders. So, if I can minimize a terrible HVAC experience by 38%, your staff will have much less time to deal with an angry tenant. The tenant has a better experience, which has never happened, so they tend to stay in the property longer. That's certainly a big priority of ours. But we brought some other products to light. I know there are a lot of different companies out there doing it as well.

 Stuff like credit building. One in 10 renters today is having their credit built. Arguably, correct, their most expensive costs every month. Tenants that are renting, right? There are a lot of tenants that rent because they want to. Many other tenants rent because they have to and can't get the qualification to purchase a property. And so credit building comes into play in that realm. We've seen people bump 20, 30, 40 points.

 We have a newer employee who started with us a few months ago, and he's been renting in a community with the resident benefit package from Second Nature—a 77-point bump since renting. I've been renting from this property manager for about 18 months. And so yeah, firsthand, he's like, hey, I've seen a considerable impact, and I don't want to move, right? Because if only one in 10 tenants is getting their credit bill, there are not as many operators offering it. 

As you have those experiences, you know, great experiences usually, sometimes a mediocre experience, even a mediocre experience in the tenant's eyes, the credibility may keep them from looking at another community because they're seeing that 20, 30, 40 point bump. So that's a big one many people are looking at these days.

 Bob Preston 21:45
Okay, so you've referred to the Resident Benefit Package. That's a big piece of Second Nature's offering. This could be viewed from a tenant's perspective as an amenity or a feature for that particular property. What's included? What is in the resident benefit package? And how does that work? I know you guys have made a big splash in this industry. So, I may be asking a softball question, but you guys have this program. What's included, and how can it benefit not just the residents but also the owners of these buildings or investors offering it to their clients or tenants?

Bob Hansen 22:26
I love the latter part of the question, too. We look at it as a triple win. You often hear people at Second Asia talk, triple win this, triple win that, or you could say triple win. There's got to be enough value in it for the investor, the operator, and the tenant for this to work, for the resident to work. And so when I think of it from an investor standpoint, being a former owner-operator at the company I work for, I mitigate that turn cost that we discussed. How do I keep a tenant in the property longer?

So that I'm not spending the $2,500 year in and year out or every other year, if I can keep a tenant for five to seven years, that's a lot of money saved as an investor. A lot of money is reserved for the operator, who can do only some of the work necessary to prepare a unit. So there's a lot of thought that goes into that in the products that we bring in. It's like, how do we keep this person happy? How do we keep them there longer? From the resident perspective, there has to be enough value in this.

From a cost perspective. So we work almost as a consultant to the property mirror saying, here's what your price we would say is like the easy button to go out and get from a tenant. And then, we will charge less on that to the operator so that they can make a little bit of ancillary revenue from it. Regarding the products it would include, we discussed the credibility and the air filter delivery service. We have a million dollars worth of ID theft coverage for every tenant in the household. Our price doesn't change.

Regardless of how many adults are on the lease. So there's value in that. We've got a rewards program that pays tenants hundreds of dollars in gift cards to large stores like your Costco, Starbucks, and Red Lobsters, right? Your Walmarts that they can utilize. That's value to the tenant, especially in a mid-market, right? Where I need to pay three, $4,000 for rent. My rent might be 900 to $1,800. So, arguably, that person who's paying that rent

It may be more challenging regarding what they can or can't afford. Getting gift cards to friendly stores and restaurants as an incentive to pay rent on time is a nice perk I'm getting from the property management company.

Bob Preston 24:34
So you pay rent on time and get some credit for your gift selection or the rewards, okay?

Bob Hansen 24:40
That's right. Yeah, so again, like getting back into that experience, how do we make, like, we live in an experienced economy? You think about it like, I look at my door and see Amazon coming here every day, dropping stuff off. I see my dog's food being dropped off. It's straightforward and convenient. People want that convenience; they want it to bring them value. So not only are our products doing that, but

There's only a little work on the tenant side to utilize those products. That happens behind the scenes. With the information we're getting in Second Nature, managing another component is with the operator. Once the lease is signed, if they're working with many different individual partners versus working with us, They must have someone assigned, so I push data and get those products running with us. We work behind the scenes and with our operators and do all the work once the lease is signed.

Managing it daily, getting that information to the bureaus, getting the rewards, and getting the tenants set up on the ID. We do all that as a Second Nature, and I think that's a significant value that drives people to our

Bob Preston 25:48
And is there an insurance element to this as well? Renters side, okay.

Bob Hansen 25:53
So insurance, we do have insurance products, whether it's $100,000 or $300,000 worth of liability. Then, we offer content to the tenant. The value for us is cost. Our price usually wins the deal. And why is that a value? Because as a partner of ours, an ex-property management company, you will message your tenant saying, hey, because you are renting from us, we can lower your cost.

Potentially from a third-party company out there. Doing that will be enough for the coverage that we're looking for you to have. We also bring value because we will manage the entire program for you. So, as a property management company, within about 45 days of executing an agreement, you should feel good that 100% of your doors are covered. I say this because most operators already know that the tenant is responsible for having insurance in their lease.

And so what we do is we say, hey, here's this new option for you. By this date, and there's a bunch of messaging that goes out to the tenant, by this date, you need to, one, do nothing, it will move you over to this program, or two, sign up for this insurance, or sorry, two, say you want to work with your state farm. Maybe your cousin works at a state farm, and you want to give him the business. You go ahead and put in your state farm policy or declarations. As the property management company, you are selected in a dropdown as...

Property manager company of record and the additional interest: We have all those files shipped to us and the notices to our PO box. So should someone drop coverage, Second Nature is notified, and then we place that tenant on to the 1095 or our policy. And then if the tenant says, oh, that was by accident; I didn't mean to have my credit card payment shut off, that's fine.

You can go back to our website, type in your declarations of your third party, and we will then adjust that and remove your charge, and you go back off to the third party. So that's what we've been up to. There are some unique things in there, like dog bite coverage, and we do not have breed restrictions and additional living expenses. We can get pretty competitive with the other options out there.

Bob Preston 28:06
So we've talked about the property managers. Are most owners of mid-sector multifamily properties hiring outside third-party property managers from the perspective that you see on the market? Or are most of them employing their team kind of resident managers? What are you seeing? I'm getting that there is an opportunity for the mid-market multifamily sector for property management companies to build up their portfolios.

Bob Hansen 28:40
Yeah, there's an opportunity for property management companies to look at the mid-market. I've been at many conferences this year with a mix of owners managing their stuff, but many owners I'm talking to are still utilizing a third-party company to manage the business. A lot of them are finding a multitude of companies over multiple markets. So they may work in three different property management companies because they're nationwide. So, there is an opportunity for a property manager to tap into that.

Bob Preston 29:13
So, for those property owners and investors that are self-managing or hiring their teams, do you, as Second Nature, work with those owners as well, even though there's no property manager? Because we're talking about the triple win. Can the property owner also engage with you guys, and then they get the okay instead of the property manager making the fee?

Bob Hansen 29:35
Yeah, absolutely. It's the triple win, with two-thirds coming from one side. The owner-operator takes it on. Yeah, I mean, it doesn't matter to us. Every manager works and effectively manages the product the same way. For me, I was having a conversation. It increases the time to close when you have the owner-operator and everyone in the same room versus a couple of different conversations. So I don't mind that personally.

Bob Preston 30:02
Okay, do you, as Second Nature, ever get involved in helping property managers or mid-market multifamily owners measure customer satisfaction or resident satisfaction? Is that something that you ever do?

Bob Hansen 30:17
I could put a number on it and stamp it with approval. No, it's an area we want to get into more. I'm sure others are; I need to become more familiar. 

Bob Preston 30:34 It would be interesting to say, OK, before the resident benefit package and after, here's the impact it made, or do some surveys or something like that. So, I was just curious.

Bob Hansen 30:45
You can look at retention as one way of measuring that. You know, that's certainly an opportunity, before working with us, to working with us now. Yeah, that's certainly an area that would tell part of the story.

Bob Preston 30:58
In summary, what do you see for the outlook for the multifamily mid-market sector? What do you think's happening out there? Where is it headed? What's the view?

Bob Hansen 31:07
Yeah, it's a beautiful area for a tenant based on cost and location, which is a vital part of where people live today. I do see personally for me and our company opportunities to help mid-market accounts attract more tenants. There's an amenities war in the Class A communities, bringing in other products, not only from Second Nature or others. You know, comparable operators out there. The mid-market has an opportunity to find a way to attract more tenants to their units. Pardon me.

Bob Preston 31:45
And regarding property managers who are listening today, is there an opportunity for the mid-market sector and multifamily to take these on as properties, target them, find them, talk to the owners, and bolster their portfolios? Or do you see it saturated from that perspective already? 

Bob Hansen 32:04
There's a real opportunity to come in if you're looking to get in, get a community. You want to enhance that community; whether it's bringing in additional resources and products that say a company like our company can bring in, or it's like remodeling, refurbishing, bringing that community up to date, you'll find that there's a decent amount of opportunity in that world to purchase something and bring a little new life to it. You can certainly make some good returns on those yields you're trying to bring in.

Bob Preston 32:33
Bob, this has been a fantastic conversation. We need to wrap up in the interest of time. What are your closing thoughts to share with our listeners about this market and what Second Nature can offer it? Could you give us your summary?

Bob Hansen 32:46
Yeah, operators who have always lived in the current state of the resident experience or, you know, the past form of the resident experience should be included. They can capitalize on so much opportunity with technology moving forward. So, anyone listening to this conversation should start thinking about the future state of the resident experience.

I started thinking about the younger generation moving into these communities and how long they will be there. Right from when I look at my parents in the baby boomer world to myself, I look at some younger cousins; we all want different things. Sometimes, those operators living in the past will tell you they will fall behind because this new generation wants so much more. They want to be contactless.

They want things at their fingertips. They want technology. They want AI, right? Those are areas to lean in on. And so, open your ears, right? You can have conversations and talk with other like-minded folks in your space. As we know, what's suitable for one operator is usually good for most operators. You know, there are other people out there who have come before you and are doing the new things. Talk with them firsthand, get some great feedback, and try to do something new in 2024.

Bob Preston 34:03
Great, great advice. Hey, I know you're a family man. You love coaching youth football. You even did some refereeing in the past. The last time I saw you was in a pub. We were hanging out, and you were drawing up plays on the back of napkins while we were sitting there. How are your teams doing? Is the season over now? Or what's going on with the youth football?

Bob Hansen 34:24
Yeah, the seasons have wrapped. We had a flag football team. I think we were talking through that. That was a bunch of five- to seven-year-olds, and we only kept score a little, but the coaches internally kept score. We went undefeated this season. My other guy went six and three. We had whooped the team earlier in the season, and they came back in week one and whooped us in the playoffs. They went on to win the championship. They just blew through the next round and put it on another team.

They had not had any losses. The two ones after us were against no-loss teams. So we feel a little better that we lost the team that won the Super Bowl—but we are already gearing up and getting ready for next year. 

Bob Preston 35:03
Okay, and when do they start, you know, donning the pads and the helmets? Is that coming soon for your kids? 

Bob Hansen 35:08
No, we have a little time. We got to get through baseball season and basketball season. That's the nice thing with youth sports, especially with football. I'm committed to football while kids should be training, and I'm a big proponent of kids playing multiple sports, not just one. We give them a reasonable amount of time off. We kick back up once practices start, like July 30th or next year. Yeah, yeah.

Bob Preston 35:29
All right, Bob, and if someone wants to contact you to reach out to you or Second Nature to learn more about the company or this particular market, what's the best way to do that?

Bob Hansen 35:40
They could go to www.secondnature.com or contact me at bhansen@secondnature.com.

Bob Preston 35:49
Bob, thanks for being on the show today. I hope to see you soon in person. I know you're a prominent NARPAM attendee as well. I am in, and we'll see you at an upcoming conference and cross paths again. And you'll show me some of those trick plays you got for your kids in addition to keeping me educated on the multifamily market. That'd be fantastic.

Bob Hansen 36:11
Most definitely, hey, I appreciate it, Bob. You're a great supporter of the industry, and thank you for giving me the time to be on your show today.

Bob Preston 36:18
Appreciate it. Thanks so much.