Measuring Manager Effectiveness

There are four fundamental indicators of an apartment manager's effectiveness.
They are:

  1. Occupancy rate
  2. Rent prices
  3. Rent collection
  4. Operating costs

There are, additionally, some secondary indicators that will be discussed below.

The occupancy rate is a measure of the apartment manager's ability to rent apartments and/or supervise people who do so. It is a simple measure. If you have 100 apartments and 98 of them are occupied, you have a 98% occupancy rate. Occupancy rate is a good indicator of the apartment manager's effectiveness, but it is not a perfect, stand-alone indicator. If rent prices are inappropriately low, that fact could bolster the occupancy rate for the wrong reason. Other factors affecting the occupancy rate are the national and local economy, more or fewer available apartments than warranted by the area population, a crime wave, or failure to allocate sufficient maintenance funding. One apartment management professional reported that when the oil drilling industry collapsed in west Texas some years ago, occupancy rates at some apartment complexes dropped to 40%. The area was overly reliant on a single economic activity. When that failed people had to move elsewhere to survive. Occupancy rate, as an indicator of manager effectiveness, must be considered in context with other effectiveness indicators as well as factors that are essentially beyond the control of the apartment manger.

Rent prices are an indicator of manager effectiveness. Rent prices are set by "what the traffic will bear." A manager should, theoretically, advance rent prices until prospective tenants refuse to rent because the price is too high. One theory holds that if an apartment complex has 100% occupancy the rent price is too low.

America's economic system incorporates inflation. Each year the purchasing power of a dollar is less than it was the year before and each year there is an increase in the "average price" of products and services. Realistically, some prices increase substantially, some not at all. It is necessary to increase prices to compensate for inflation. It is necessary to do that just to "break even." When the author was young an ice cream cone could be purchased for a nickel a scoop. A recently purchased ice cream cone cost $1.35 per scoop. That's 27 nickels.

Ideally, rent prices are increased at a moderate, uniform pace. But economic change or severe competition can disrupt the pace. It is relatively easy to increase rent prices when an apartment turns over, before the next tenant moves in. That works well in areas that have high turn-over rates. How and when to apply rent increases to tenants already living in your complex is a more challenging question. Should tenants who have been living in your complex for several years pay the same rent price as someone just moving into a freshly renovated apartment? You undoubtedly bring vacant apartments to a high standard replacing, as necessary, floor coverings, window coverings, and painting and repairing. Have you done the same for the continuously occupied apartments? If someone moved out of one of your apartments after ten years could you rent that apartment, as is, at the "market" rate? Probably not. Rent increases must be applied to occupied apartments, but there is debate among management officials as to whether the rent for long-term tenants should be "market" rate or slightly less than the going rate. In any event increasing rent prices is one of a manager's basic duties. If rent increases are applied inappropriately tenants will move out and prospective tenants will refuse to rent. A manager's effectiveness in this realm is a combination of the ability to apply rent increases and the ability to correctly assess the appropriate amount and appropriate timing of increases. The overall, long term application of rent increases cannot fall below the inflation rate and the investors would be happy if rent increases soared somewhere above that rate.

Rent collection is a fundamental measure of a manager's effectiveness. Rent collection is as basic as it gets. The goal is collection of the rent in full, on time, every time. Nothing else matters if the rent isn't collected. However, even this measure has a caveat. If, because of vacancy rates, investors or apartment management company officials insist that the apartment manager lower standards and accept marginally qualified, high-risk applicants, 100% collection of rents is not realistic.

Operating costs are an additional measure of managerial effectiveness. Operating costs that can be used to measure an apartment manager's effectiveness must be limited to costs that can be controlled or influenced by the manager. Maintenance costs are basically a reflection of investor or management company policy. Is it company policy to maintain the complex in excellent condition? Is the policy to spend as little as possible on maintenance? Maintenance policy can be deceptive. If you defer maintenance and do as little as possible to apartments during the turnover process, net profits will begin to look very good. But that way of doing business will eventually produce customer resistance: vacancy rates will increase, the turnover rate will increase, rent collection will become more difficult, and it will be more difficult to increase rent prices. It is an apartment manager's responsibility to insure that expenditures are needed, that work is competently performed, and that labor and materials are priced reasonably. It is also an apartment manager's responsibility to develop as close a correlation as possible between actual operating costs and the figures in the budget that reflect anticipated operating costs.

We could, perhaps, summarize all of the above into the familiar term, net profit. However, net profit is an accurate measure-in the short term-only if we are assured the value of the property is being maintained, that maintenance, repairs, and replacements are not being deferred.

There are several secondary measures of an apartment manager's effectiveness. One of those is vacancy days. How many days is an apartment vacant (without rent income) during a turnover? The number of vacancy days reflects scheduling efficiency, i.e. scheduling of work crews, supervision of work crews, and the efficiency of leasing personnel. It is an imperfect measure. Older buildings usually require more turnover work than new buildings. Lower priced buildings may have longer turnover time because of lower staffing levels. An experienced manager may hold an apartment vacant for a few days for an incoming tenant who will probably be a stable, long-term tenant. Technically, that incoming tenant should be paying rent on the apartment that is being held and that is the generally recommended practice. As with many other things, there are exceptions.

Tenant retention has been used to measure manager effectiveness. Tenant retention receives special focus during an economic downturn. The technique, in that context, hinges on interviewing tenants whose leases are about to expire. The purpose of the interview is to learn tenant intentions and discover what, if anything, the company can do to retain those tenants who plan to leave.

Appearance of the property is a valid secondary indicator, because appearance of the property is important. First impressions affect many prospective tenants. Many tenants would probably move out if the appearance of the property were allowed to deteriorate. Good property appearance probably provides an intangible contribution to crime prevention. The appearance of the property affects the value of the property. Maintaining the appearance of an apartment complex requires daily inspection of the property, effective supervision of the maintenance staff, and requires ensuring that appropriate funds are budgeted for maintenance, repair, and replacement.

Some management companies rate mangers on their sale of ancillary services. The list of such services might include sales of bottled water, sale of utilities, sale of renter's insurance, or sale of storage space. It should be noted that sale of insurance may require a license.

One apartment management company the author has knowledge of measured manager effectiveness based on the percentage of the tenant's "security deposit" retained when the tenant moved out. The author does not recommend this practice.

Some management companies employ "secret shoppers" to pretend they are prospective tenants and rate the manager and sales staff. The process is extremely subjective. No competent supervisor uses these reports when measuring manager effectiveness. Measurement of manager effectiveness is valid only if it is based on relevant, documented fact and on the supervisor's direct observation of the subordinate manager.

Some companies, in sheer desperation, evaluate personality traits and habits. It is a subjective and irrelevant measure. I may believe an apartment manager is crude and rude, but if that apartment manager has high occupancy rates, high rent prices, and collects the rent, it doesn't matter what I think.