Operators of Apartment Buildings

SIC 6513

Companies in this industry

Industry report:

This category includes establishments primarily engaged in the operation of apartment buildings. Apartment buildings are defined as those containing five or more housing units.

In 2010 there were 17.4 million apartment units in the United States, according to the National Multi Housing Council (NMHC). Operators of apartment buildings are responsible for a valuable asset: income-producing real estate. Their goal is to preserve the asset and increase its value over time through proper management techniques, while generating current income. It is a common misconception that operators of apartment buildings merely collect rent, show apartments, and sign leases. In reality, the operation of an apartment building is far more complex. This is why many owners of apartment buildings contract with a professional property management firm to oversee management of their property and maximize its value.

Property managers act as the agent of the owner of the property and have a wide variety of responsibilities. They market vacant apartments to prospective tenants and establish rental rates in accordance with local conditions. They negotiate and prepare leases, collect rents, hire maintenance personnel, and handle the bookkeeping (taxes, mortgages, insurance) for the property. The property manager must also prepare reports for the owner concerning all aspects of the apartment property. Effective management of apartment buildings, from small buildings to very large apartment complexes, thus requires expertise in business management, real estate, finance, and accounting.

The demand for effective management of apartment buildings began in the late nineteenth century, in large measure because of two inventions that changed the face of urban real estate. Creation of the steel frame building and the electric elevator made possible the advance of high-rise apartment and office buildings, changing the urban landscape forever. Construction of multifamily apartment buildings certainly contributed to this transformation.

The Great Depression of the 1930s had a profound effect on the evolving property management profession. Numerous failures and foreclosures during this era placed much of the nation's real estate in the hands of institutions such as trust companies, insurance companies, and banks. A large number of income-producing properties thus fell into the hands of corporations. While some of these corporations formed their own property management firms, many quickly realized that responsibilities involved more than simply collecting rent payments and selecting tenants. As the need for more specialized expertise emerged, the industry gained strength in numbers and stature.

Professional apartment management firm must have a comprehensive understanding of the economic forces at work in the real estate market. Operators have to be able to realistically evaluate the property in light of the real estate market, forecast its potential for the future, and construct a management plan to maximize the building's potential market value, while remaining flexible to the demands of the ever-changing real estate market.

Most property managers handle several buildings simultaneously. Managers also negotiate contracts for security, trash removal, landscaping, and janitorial services for common areas. If the building has other facilities, such as a swimming pool, tennis courts, health facilities, parking areas, or a golf course, maintenance and repair contracts for these areas must also be secured. Managers oversee all repairs and maintenance of the property. At a larger property, they hire personnel to maintain the facility's heating, ventilation, and air-conditioning systems and perform routine maintenance and repair work.

Generally speaking, investing in apartments is considered low risk. The relative stability of the apartment marketplace makes it an attractive investment for those interested in purchasing real estate. The demographics of the renter's marketplace has shifted toward older couples who want less responsibility than that required with a house and childless couples who do not always need a lot of space. Also, there is money to be made in ancillary services, such as allowing companies to use rooftops for transmission antennas or making a deal with local cable operators.

In the early and mid-2000s, apartment vacancy rates were up slightly, as the market reacted to historically low interest rates, which spurred the home buying market. In response to the rising demand from buyers, apartment developers and owners began converting apartment complexes into owner-based condominiums. In addition, industry advocates, including the NMHC and the National Apartment Association (NAA), fought the establishment of a federally insured no-money down mortgage program through the Federal Housing Administration. Fearful that it would draw low- and middle-income families away from rental housing, the NMHC and the NAA argued that the program would place undue financial stress on many families who could not afford to maintain a home after securing a no-money down mortgage. Indeed, the so-called subprime mortgage crisis of the late 2000s resulted in a record number of foreclosures as homeowners fell behind on their payments.

According to figures from the NMHC, in the early 2010s about 34 million Americans lived in apartments, equaling about 43 percent of the population. Apartment rental rates were much higher in highly populated urban areas. For example, in New York City, 66 percent housing units were occupied by renters. In Los Angeles and Chicago the rental rates were 61 percent and 53 percent, respectively. Single men and women made up 50 percent of all apartment renters. About 38 percent of apartment renters earned an average annual income of less than $35,000. States with the highest density of apartment dwellers based on percentage of total population included the District of Columbia (32 percent), New York (23 percent), California (16 percent), Nevada (15 percent), Hawaii (14 percent), North Dakota (14 percent), Texas (13 percent), and Maryland (13 percent). The largest growth areas included New York, Miami, Los Angeles, Houston, and Atlanta.

Nearly 47 percent of all apartment complexes in the United States were owned by individuals in 2010, according to NMHC. Partnerships owned about 20 percent; real estate corporations, about 6 percent; nonprofits and co-ops, almost 4 percent; other corporations, 3.5 percent; and real estate investment trusts, 2 percent. In this highly diversified market, more than 62,000 apartment operators existed in the early 2010s. The industry employed about 288,000 people.

Apartment vacancy rates were up as the first decade of the twenty-first century came to a close, due to the economic recession that had begun in 2007. According to the National Apartment Association in August 2010, "The apartment industry has faced some of its greatest operating challenges in decades," but there was hope for a recovery in the industry. Figures from MPF Research showed that the number of occupied apartments increased by 215,000 units in the first half of 2010, almost double the increase of 110,000 units for all of 2009. As stated in the NAA's "Executive Summary," "The apartment industry is clearly entering a period of improved fundamentals and in this time of rebound, sustained diligence in operations is required to produce the expected bottom line results."

According to the NMHC, the five largest apartment managers in 2010 were Pinnacle Family of Companies (Seattle, Washington), which managed 183,877 units; Riverstone Residential Group (Dallas, Texas), with 178,431 units; Greystar Real Estate Partners (Charleston, South Carolina), with 153,891 units; Equity Residential (Chicago), with 136,843 units; and Lincoln Property Co. (Dallas, Texas), with 132,881 units.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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