5 Threats to Your Property Management Business

[Andrew Propst]

We are sure you have noticed a number of changes in the real estate industry during the past 14 months of Covid. Some of these changes have benefited the 3rd party property manager and some have hurt. Here are five potential threats we see for third party property managers.

1. A white hot real estate market - As the market continues to stay hot, reluctant landlords are selling. This off-load of potential rental properties leaves the industry fewer properties for property management companies (PMC’S) to manage. Realtor.com's market data for the week ending May 1, 2021, shows that the median home price of all the listings increased by 15.4 percent over last year, notching the 38th consecutive week of double-digit price appreciation. Investors are cashing out.

2. On demand service applications - As we find ourselves more and more technology driven, and requiring an immediate response, many self managing landlords are using tools that allow them to access vendors, repair companies, lock boxes, signs, etc online. Willing participants work when they want, can perform when they want, and choose what services they offer. Advancements in the prop/tech space are not only creating different owner and renter experiences, but also reshaping the role of a property manager. The “Uberization” of property management is here to stay.

3. Consolidation - With Venture Capital and Private Equity firms committing funds to consolidate all service industries, the blitz to buy mom and pop PMC’s is on. According to mercer.com, globally, capital commitments of private market funds have been increasing consistently for several decades and reached a record level of US $3.1 trillion in February 2021. This represents a nine-fold increase over the past 20 years. The shift to institutionalize and dominate the market is forcing small property management companies to consider selling before they become extinct.

4. Finding and retaining talent - Many industries are facing a talent shortage on many levels. This is the reality for the property management industry today. Talent shortages in the U.S. have more than tripled in a decade with 69% of employers struggling to fill positions up from just 14% in 2010, according to a new ManpowerGroup survey. A shortage of employees can produce a variety of negative effects, hindering the ability to grow and expand, or even to meet existing staffing needs. The bottom line is that companies will lose their competitive advantage if they can’t hire and retain talent.

5. Tax law changes - Anxiety over potential tax law changes is why some investors are selling in unusually high numbers. Data shows that investors are putting properties up for sale to get ahead of proposed tax rate increases and possibly the elimination of capital gains protections. New tax rules are at the core of President Biden’s ambitious economic plan, “American Families Plan” that calls for $1.8 trillion in spending and tax-credits for provisions, The most prominent impact of the plan on real estate is the treatment of capital gains. The present capital gains rate of 20%, the lowest in a decade. This would rise to 39.6% for the highest earners. Biden’s plan would remove the ability to shield capital gains above $500,000 from taxes. Mr. Biden also seeks to close the death loophole by taxing capital gains on inherited assets. “From a broader market perspective, restricting 1031 exchanges could generate a short-term surge of activity as investors liquidate assets that have significant appreciation and/or deferred taxes,” according to John Chang, senior vice president and national director of research services at real estate firm Marcus & Millichap in an analysis emailed to CoStar. “These investors would try to clear the books before the new tax rules are put in place.” If capital-gains taxes are high and investors are unable to exchange in the future, we can assume that many willing investors will put their money in another asset.

From hot markets, “Uberization” of services, consolidation of the industry, workforce challenges, and tax changes, the threats are real. It may be time to consider cashing out on what you have created. If you sell your business you may choose to continue working in your same office for a great salary, move to another industry, or retire. Taking your money off the table is a smart move that could be your best move.