Last modified on January 25th, 2023
By Megan Eales Monroe
What does 2023 have in store for the residential real estate market?
It may seem at first glance that the year ahead is full of risks, from record inflation to talks of recession. But, as we reveal on this episode of The Top Floor podcast, there is still widespread optimism within the real estate management industry, and plenty of opportunity for those who know where to look.
To help property management businesses spot and take advantage of those opportunities in 2023, we chat with Dror Poleg, Economic Historian, speaker, and author of the book, Rethinking Real Estate: A Roadmap to Technology’s Impact on the World’s Largest Asset Class.
Listen to the full episode below to get his expert insights on the trends that will shape the residential real estate industry this year, plus hear key findings from the 2023 AppFolio Property Manager Benchmark Report.
Meet Our Guest:
Dror Poleg is an author and speaker focused on the future of work and cities.
He is the author of Rethinking Real Estate, an award-winning book that predicted the current reshuffle of offices, homes, and cities. His insights have been featured in The New York Times, Wall Street Journal, Financial Times, NBC, Bloomberg, and beyond.
Dror’s work draws on two decades of hands-on experience in private equity and tech. He regularly briefs and advises multibillion-dollar companies such as UBS, Bank of America, HSBC, Recruit Holdings, BCG, AvalonBay, CBRE, Hines, British Land, Liberty Mutual, Dubai Holding, Cushman & Wakefield, and others.
Dror holds a Masters in Economic History from the London School of Economics and a BA in Media & Communications from SUT. He has taught and spoken at events by The University of Zurich, Harvard Graduate School of Design, The Wharton School, The University of Toronto, The University of Colorado, and The City University of New York.
Megan Eales Monroe: From rising interest rates to talk of recession, some big challenges are dominating property management conversations at the start of 2023. But since we know that challenging times can also present significant opportunities for growth, on this episode of The Top Floor podcast, we wanted to take a deeper look at some of the big opportunities this new year also has in store, and explore how rental operators can set themselves up for greater success.
To do so, we’ll first need to take a look at what’s happening on a big-picture, macro scale to see what trends are going to impact property management most. Then, we’ll zoom in on what’s happening on the ground floor of property management by diving into key findings from the 2023 AppFolio Property Manager Benchmark Report.
And we couldn’t think of a better guest to help us do both than Dror Poleg. So, let’s get to know a little bit about Dror before we dive in.
Dror Poleg: Sure, great to be here. So, I spent two decades in real estate development and in tech. In real estate development, that meant mostly working in private equity real estate, so acquiring land on behalf of investors and then developing it, building offices, apartments, and shopping malls, mostly in China, of all places. A very large, very fast growing, fast moving market.
My academic training is in economic history, which basically is like economics, but focused on history, as the name implies, but mostly about big questions in history, from things like why did the industrial revolution happen in England rather than in the Yangtze River Delta in China, to more specific questions like why are some industries more concentrated than others, and why do people live where they live and why some cities are more productive than others?
So, through that lens, over the past seven years or so, I’ve been focused almost exclusively on looking at how technology has impacted the evolution of the built world. Both historically, so over the last 200 years in particular, and right now, so looking at things that are currently happening that maybe are not fully understandable yet, or not fully visible to everyone and trying to understand, based on history, where they might be headed. As part of that work, what I do day to day is mostly speak to large investors, brief them, scare them a little, give them a little hope, and try to give them an idea of where things are going. A lot of speaking, a lot of teaching, and writing as well.
Megan Eales Monroe: In addition to writing for his own newsletter on DrorPoleg.com, you’ve likely also seen Dror featured in publications such as The New York Times, Wall Street Journal, Bloomberg, and The Financial Times, just to name a few.
And you may have even read his debut novel, Rethinking Real Estate, A Roadmap to Technology’s Impact on the World’s Largest Asset Class, which received the 2020 Gold Prize from the National Association of Real Estate Editors.
Dror’s impressive resume and long list of accomplishments have been almost 20 years in the making. He originally started off in real estate development before leaving to develop his own tech startup for an app designed to fight urban loneliness.
The startup didn’t exactly go as Dror planned. But it did catch the attention of people in the real estate industry, which is when he decided to pull all of his experience together into a brand-new career opportunity.
Dror Poleg: Actually, the failure of that startup made me think a little bit about those two worlds that I’ve inhabited for two decades, the world of tech and the world of real estate. I started seeing that, one, they were converging in various interesting ways, that there’s a lot of new technology coming into real estate, and also that technology, in general, is driving a lot of social changes in terms of how people work, how people get married, how people travel, how people spend their time and socialize, that is going to affect how we actually use physical assets and even cities as a whole.
It also made me realize that I’ve actually been dealing with real estate tech for a long time without ever kind of calling it that. Again, with my development work and using sensors and location-based systems and other things when developing and operating shopping malls, I suddenly realized, “Wow, there’s a lot of lessons from retail that people in office and in multifamily and in industrial are going to have to get familiar with over the next few years.”
I started writing about it and speaking about it. Frankly, at first, I was thinking I’ll just do this because it interests me until I figure out what I really want to do when I grow up or for my next job, but then people started reaching out to me, asking me for help, asking me for insights.
Megan Eales Monroe: And Dror’s insights are exactly why we invited him to be a guest on the show today. Since he has a unique view of what’s happening on every level, across the entire real estate industry, we asked him to dive into the top trends he expects will shape residential real estate management in 2023.
Dror Poleg: One of the biggest is really the rise of remote work and hybrid work. Both in terms of its impact on overall demand, not necessarily negative impact, but just shifting demand maybe from one place to others, some places to others. And also changing the times of day that people spend at home, the types of things that they do at home. That obviously impacts their needs and the services that they may require, and the impact on different systems in the building and in the neighborhood as a whole. I think this is by far the largest one.
That said, it doesn’t mean that everyone is now going to be working from home. Most people will continue to work from offices, but a lot of those offices will be in different places. They’ll be temporary, they’ll be part of a network that the company enables people to have access to.
Ultimately, hybrid is settling around 20-30% of the market. Of course, it varies by industry, and it also varies by city because some cities are just easier to commute in, or they’re more walkable, so people are willing to come to the office because it’s not a big deal. That number often leads landlords or property managers to a lot of complacency because they say, “Oh, okay, 15%, 20%, no big deal. Most of the market will still be there,” but in reality, that’s not what it means.
If we ask ourselves, can offices demand 15% or 20% of it, if that shifts to another location or shifts online, and as a result, also some housing demand gets reshuffled from one place to another to the extent of 10-15% of the market changing, and all of that happening within two or three years, not 20 years, to two industries that didn’t expect it at all. Offices and even multifamily, people assume that they’re just stable and people need to be where they need to be and they’re just going to keep coming back because they all need a place to work and a place to sleep. That has a tremendous effect.
That effect creates a lot of new losers and some new winners. Those winners are those people that adapt properly, that think about their customers, that build those new brands and that create great experiences.
A second trend driven by technology that is interesting, it’s much smaller in its extent, but I think it’s interesting, is the convergence of hospitality and multifamily from the side of things like Airbnb, where we’re seeing platforms trying to streamline the leasing and marketing process and turn it into something like an Airbnb-type experience. Instead of spending weeks on exchanging paperwork and sending your social security number to people and talking to multiple entities, to just do it as much online as possible. We’ve seen even Airbnb itself recently step up and launch its own residential leasing platform, not just for short term, but really for people that are looking for an apartment.
They’re doing it first because they want to secure, basically, hosts of people that rent apartments and then can list them on Airbnb and to do it legally with the agreement of the landlords and making sure that the landlords are compensated. But ultimately, it represents deeper involvement of Airbnb in general in the residential leasing process, which I think both means that they might become a bigger player in this space, but more importantly, that they can pioneer all sorts of processes and standards that then are adopted by the rest of the market so that customers start adopting and expecting things that may be the existing leasing process does not allow them.
On the other side of the innovation market, we’re seeing a similar trend, but from a different direction, where operators that started by targeting a very narrow niche, like co-living, let’s say, developed for that niche certain brands, and certain marketing strategies, and certain solutions to streamline the apartment leasing process and the showing process, and to tell a story of the apartment and to focus the leasing process on specific groups of people, just like a consumer brand to say, “Hey, we’re focusing on people that are 25 to 30 year old that are planning to share an apartment that just graduated college. These are the specific needs, so we’ll design the apartments and offer services to make sure that we are the most attractive solution for them.”
We’re seeing the same playbook start to apply to more and more types of audiences and of segments. Launching brands focused on families, or brands focused on workforce housing, or I’ve seen people talk about even more niche things like buildings for people that are divorced and only have their kids on certain days a week, or buildings for empty nesters.
But that idea of thinking of buildings as consumer products is one of the big themes in my book and I think is going to become very significant over the next few years with an interplay with the first trend that I described. Because remote work suddenly gives people more choice, when you have choice, you go to brands that appeal to you. That’s when brands become important. That’s the second one.
Third, I would say there’s the general macro environment, all the uncertainty, mostly negative at the moment. Both inflation and the tight labor market at the same time. Currently, we get both of them at the same time. At some point, we might be able to lower inflation, but at the cost of some sort of recession, but we’ll see how the economy lands, but that’s definitely a big issue.
The fourth one I would say is the desperation that a lot of cities and municipalities have, I think it would be an opportunity for multifamily because governments might become a little more open minded in the things that they allow in order to enable housing, in order to create jobs, in order to allow the adaptation of their city centers or even other regions from office centers to more residential centers. That’s another interesting trend that I’m tracking, looking at the next 18 months or so.
Megan Eales Monroe: Of course, in addition to trends, there are opportunities and risks too. Dror talked earlier about how the shifts and changes over the next 12 to 18 months will create new winners and new losers. So we asked him to explain what property management companies should be watching out for in 2023.
Dror Poleg: Yeah, it’s all a mixed bag. I wouldn’t say there’s risks. I see a lot of good news and a lot of opportunity, basically. Again, I said remote work reshuffles things. That means that if you’re complacent and comfortable and you don’t want to do anything new, that might be trouble for you. But if you’re open to trying to capture new opportunities, that basically allows you to attract people that weren’t even potential customers before to come to you now, if you do the right things and you make yourself attractive.
When you think that things are good, that’s exactly the time to actually pay attention to what’s happening at the bottom of the market where low-end customers, or underserved customers are struggling, and to see the brands and the new disrupts that are catering to them. If we see what happened in the office market over the last decade, there’s a very instructive dynamic there. When you have a company, let’s say WeWork, that initially emerges, landlords look at it, office landlords look at it and say, “Okay, this thing is a joke. They only cater to people who can’t even afford an office. They steal customers from Starbucks. They’re not relevant to us.” Then they see WeWork start to cater to slightly larger companies, and even to some enterprise, so big name Fortune 500 companies.
Then the landlords say, “Yeah, okay, but it’s just a small niche. We don’t care about it. We don’t need to offer all of these bells and whistles. We don’t need a brand. We don’t need flexibility. We don’t need to have an app. We don’t need to allow them to book their own tours. That’s fine. Even the customers that are big that are using them, that’s a small part of the market.”
Then they see it grow and then they say, “Okay, customers are willing to pay more per square foot for a WeWork, even though we would offer them the same space under a traditional lease. But you know what? I don’t need the premium. I have my own business, I know what I’m doing, I’m just going to stick to that.”
But at some point, the market reaches a point where customers, or tenants, are not even interested in the traditional product anymore. They come to a building, and they say, “Okay, this building, it doesn’t give me any flexibility. It doesn’t have any swing space in case I need to suddenly expand or suddenly contract. It doesn’t have community management and events. It’s not attractive. It doesn’t even think about my own employees and the actual individuals in my company. It just wants to sign a lease with me. This building is not relevant at all. Also, I cannot find it online because it doesn’t have a brand, it doesn’t have strong online marketing presence.”
In a moment, almost, suddenly all of those buildings, not just that they’re willing to give up some premium, but they’ve just become completely irrelevant. The new features that were pioneered by the disruptors and the startups become table stakes at some point. We’re seeing a clear dynamic in the residential market in the same direction again, where co-living companies used to be just these tiny things that cater to customers that nobody wants to deal with anyway, people who just want to rent an apartment by the bedroom, but then gradually, their playbook is moving up market and again, from the other direction, something like Airbnb that suddenly is defining what residential leasing is going to look like in five years.
You either catch up with that, or come up with your own ideas, or you just become that boring old building that nobody can find and is a pain in the behind to deal with and to contract with. Even in a market where general demand is strong, I think this is an issue.
To go back to remote work, the fact that macro-demand is strong doesn’t mean that every apartment in the country will just be leased and everyone will be happy, because again, people have a choice and they don’t want to deal with brands that are unpleasant and don’t seem to represent their interests or to cater to their circumstances, especially if there’s other brands now that are doing that.
Again, you’re competing with companies that are doing different things, even if you don’t want to. That’s another lesson from the office market. WeWork financially still didn’t figure out how to make its business work. That meant that a lot of landlords just dismissed it as a fad, it will go away.
But realistically, we’ve seen that even though it didn’t make financial sense, it still changed the market. The stuff that it offered forced everyone else to fall into line and start to offer the same thing. The fact that something doesn’t make financial sense doesn’t mean that you can ignore it, or it’ll go away because you’re offering your customers something. You either choose to play that game and compete, or you can just say, “I’ll just keep doing what I’m doing and count on macro forces to carry me forward,” but that’s an increasingly risky proposition I would say.
Second, tight labor market. Again, could be a problem, but also means you can adopt technology, you can innovate, you can streamline all sorts of processes, you can do all sorts of things that you should have done, frankly, a few years ago, but now you’re forced to do them, so just do them already. Now you can convince your lender to let you do it, or you can convince your LPs or the owner of the building to let you implement those things. Or you can convince your boss to let you install that thing that you’ve been using secretly and now you can actually get the company to adopt. It’s a great opportunity for that.
Megan Eales Monroe: There’s no doubt the rental housing industry has had to navigate one obstacle after another over the last few years. But what about the other side of the coin? Surely, there are opportunities to be had next year, even with the challenges Dror mentioned.
To find out, AppFolio surveyed nearly 5,000 employees at U.S.-based property management companies to create the annual AppFolio Property Manager Benchmark Report. This year — 2023 — is the report’s inaugural year.
Interestingly enough, the report showed that the property management industry has an incredibly optimistic outlook for the next year.
In fact, the top three opportunities for 2023, as identified by our survey respondents, are all about growth. In descending order, those top three opportunities are: One: Adding new units. In terms of expansion, 55% of property management companies surveyed, regardless of size or portfolio type, believe that adding new units to their portfolio is their biggest opportunity. Two: Improving customer service, with 42% of respondents saying it was a top opportunity in 2023. And finally…Three: Hiring additional staff. Just 1% of respondents say they’re considering layoffs while 52% are looking to hire additional staff.
All three opportunities identified by survey respondents are also opportunities Dror agrees with. He also encourages property management companies to take advantage of them right now.
Dror Poleg: As we mentioned earlier, the market is getting reshuffled. It’s not necessarily bad news, but it’s only good news if you actually do something about it and try to capture it and try to respond to it. I think looking to bring more units under management, and at the same time, as they mentioned, to try to improve customer service and hire more, and hopefully hire better, makes complete sense to me. There are opportunities out there, now is the time to grow if you can. Makes sense.
We’ve seen recently a big trend now of office conversions to residential, more and more states making it a little easier to up-zone different areas and build more apartments. Now that’s exactly the kind of stuff that you could look at as good news or as bad news. You could say, “Oh no, there’s more supply coming up. People are going to compete with us. Now offices are going to become apartments.” Or you can look at it as an opportunity and say, “Hey, there’s new stuff that I can develop now. There’s stuff that I can do that the government didn’t allow me to do previously and probably now it’s going to allow me to do that because it’s becoming desperate.” Frankly, I’m happy to see that property managers are thinking along these lines as well.
Megan Eales Monroe: Although the top three opportunities identified in the 2023 AppFolio Property Manager Benchmark Report were universal across portfolio types and sizes and operator types, single-family and multifamily respondents did have some meaningful differences in their responses.
To start, single family respondents were almost twice as likely to see adding new units to their portfolio as an opportunity compared to multifamily organizations.
Additionally, single family companies are more likely to see improving customer service, streamlining or automating operations, and opening up new revenue streams as opportunities.
And finally, single family businesses reported more opportunities in general than multifamily businesses did.
Here’s Dror’s take on the findings and what they say about residential real estate for 2023 and beyond.
Dror Poleg: Speculating here, but there’s an interesting report from the Federal Reserve of Kansas City that came out a few days ago in December 2022. That report basically looks at how much time people spend commuting, how much time they spend commuting before COVID, and how much time they’re spending now when they’re working only three days a week, let’s say, at the office compared to five days a week. Based on their savings in commute times, the Federal Reserve of Kansas City and the economist that they hire basically estimate that that opens up hundreds of thousands of new single-family units for development because it basically opens up new areas not too far from cities, but a little farther away from where single-family commuters used to live. Just in terms of pure opportunity, there might be much more opportunity to develop more single-family housing because most of those areas that are being opened up, they don’t allow multifamily at the moment, or at least it’ll be really hard to build multifamily in them.
Of course, part of the hope is that governments in those areas, or even state governments will actually force some of those areas to allow up-zoning, at least near main highways or main train lines. But I think in terms of pure opportunity for new construction, there’s probably more of that for single-family housing than for multifamily housing in many areas. That’s one way of understanding it. Again, there might be other explanations, but just in terms of relying on data that I have, that’s the first thing I’ll go to.
In terms of the focus on customer service and on improving that, that’s higher for multifamily than in single family. That also makes sense because I think with everything we’ve said about them so far on all the things that they can do better, still multifamily developers are much more focused on customer service. It’s a much more mature and established rental and service market compared to single family housing.
Single-family housing, even if it’s for rent, the developers and investors in that space are currently just focused on getting more and more supply. I think at some point they’ll have to start thinking, “Okay, how do we actually service all of those portfolios and offer them something that a traditional landlord would offer in multifamily?”
But at this point it’s more just about getting the houses and renting them out, rather than really having that experience that you’re actually getting service from anyone, which even in the worst multifamily projects, you at least know that you have a landlord, that you have somebody to call and to talk to, which in rental single family houses is not yet the case. It’s much more of a mom-and-pop thing, that people just expected to talk to some person rather than to an actual company that has a service mentality and tools that enables you to submit service requests.
Megan Eales Monroe: Although the outlook for next year is mostly positive, that doesn’t mean survey respondents don’t have concerns, too. For example, nearly half of the property managers we surveyed are worried about both inflation and delinquencies – which were reported as two of the biggest risks that could arise in the next year.
And it’s no surprise, given the ongoing talks of a recession amid record inflation rates in the U.S. But, in general, the concern seems to be lower for single-family portfolios than multifamily portfolios. Here’s Dror’s take on our respondents’ feedback.
Dror Poleg: That makes sense, both because of inflation and again, it’s not so clear what’s happening in the labor market so far. We’re recording this now in middle of December. I know it’s going to be published in a few weeks. So far, we’ve seen mostly softening of tech employment, but the rest of the economy is still behaving like everything’s okay. But over the last few days, we started seeing even consumer good companies start to slash jobs. PepsiCo and a little earlier, even Amazon slashing some more like manufacturing jobs. We might see some softening there as well. Frankly, it looks like the Federal Reserve is trying to cause some softening there. I wouldn’t try to fight the Fed. If that’s what they’re trying to achieve, they might be able to achieve it.
But more broadly, it goes back to the COVID ratchet effect, as well. During COVID, we saw a lot of stimulus, a lot of money being printed, a lot of people getting checks, a lot of people getting rent vacations from their city governments, or state governments that allows them to not pay rent for a while. I think we haven’t fully absorbed the return to normal from all of these effects. We’re in a very strange period. Being worried about delinquencies makes sense to me. Hopefully it doesn’t come to pass, but completely understandable that that’s the main concern in landlord’s minds and in property managers’ minds.
To my knowledge, this wasn’t the case so much in single family rental markets. You didn’t have a rental moratorium with single family houses, at least not to the extent that it was in large cities like New York and San Francisco and others. That, to me, would probably be the best explanation that I can think of for that. There are less suppressed delinquencies through policy that is now expiring in the single-family housing market than there is in the multifamily market.
I think the single-family rental profile, in general, one, the rent burden tends to be much lower for single family houses compared to a lot of urban multi-family. Second, there’s usually multiple people living in the house, or you might have two salary earners, or if one is in trouble, the other can carry the load. Third, generally single family tends to be more for families and economic units that are a little more stable than, on average, people who live in apartments. Of course, there’s a lot of great tenants and families that live in apartments as well. But I think if we’re looking at a comparison between the two, this is part of what explains the differences.
Megan Eales Monroe: The opportunities our respondents noted in the 2023 AppFolio Property Manager Benchmark Report were fairly universal across portfolio size and type. But we did see major differences based on how property management organizations prioritize their operational goals for next year.
Our survey showed that large property management companies are more likely to be focused on reducing costs, while smaller to medium size businesses are more focused on freeing up teams from labor-intensive processes. And as Dror explains, even those two approaches are connected.
Dror Poleg: One, they don’t seem too different when you compare these two options. They probably mean the same things, but different companies think about them in different ways. Large operators tend to be a little bit ahead of the curve, mostly because they see data from multiple markets. They might see something coming that the smaller operator focused in one market that is doing well might not yet notice, or at least not be worried about. But in this labor environment, everyone is looking to cut costs one way or another.
As we said at the beginning, technology is now becoming table stakes. It’s no longer about innovation. It’s really about making sure that you understand all the tools that are out there and to make sure that you’re implementing them. Because if you don’t do that, then you’re completely irrelevant. To do that, to have the best tools in place in terms of property management, that’s just basic. You must be able to do that. Then beyond that, you have to start thinking about your strategy and your brand and how you actually compete and stand out. But just using technology, in a way, is no longer a way to stand out. It’s just a way to survive.
If you go through the real estate customer journey, at every step you see opportunities to make things better. Honestly, a lot of these opportunities are really simple. They’re really a bread-and-butter issue. They don’t require a lot of coming up with new ideas.
Starting from how people find an apartment, how they share their information, how they access information about the asset or the building that they’re looking at, how they provide information, the kind of forms that they fill, the kind of information that they get in return, how things are being booked. Even there, if you compare it to other industries, other consumer industries and you see their workflows and how they streamline things and how they automate things and how they make it fun and pleasant, there’s a lot of room for improvement.
Then once you get to the building itself, access control systems, sensors and other things that improve energy consumption, or preventive maintenance that can tell you in advance if a pipe is about to burst, or if a dryer or washing machine has some problem before people even have to complain. We have now tools that enable us to do all of those things.
Startups are guilty of that as well, trying to jump too far ahead instead of addressing the bread-and-butter stuff. We have a million, let’s say, tenant engagement tools that are trying to be the next Facebook, while at the same time, if I just want to report a little maintenance issue, it’s too complicated for me, or it looks like a form from the Middle Ages. There’s a lot of little things that as a tenant, I just want to be easy for me to do, to know that it’s in process, to see who’s handling it. Just like when I book an Uber, I know the driver is now making his way and that’s what he’s going to do, and leave some feedback automatically, and understand who you’re dealing with.
A lot of these little touches to bring the real estate experience up to par with what people are currently getting in almost any other industry where they’re spending their money, and usually when they’re spending much less money than they do on their buildings. I would focus on these, just really go try to be your own customer and go through the steps that they go through and then go buy something else at a brand online and compare the two processes and say, “Okay, how much fun or pleasant was this process compared to what the best brands in the world are doing?” Tick all the boxes until you get up to par, I would say.
Megan Eales Monroe: So, what can we take from the eye-opening finding from The 2023 AppFolio Property Manager Benchmark Report? And how will these findings impact the next year and beyond? We asked Dror to sum up his thoughts.
Dror Poleg: I think overall, the report really shows that property managers are focused on what they should be focused on right now. One, that they’re still relatively optimistic. They’re looking for opportunities to expand in this great reshuffling. They’re very aware of things that they should be worried about, whether it is the labor crunch or interest rates and the impact on the overall economy. They seem to be talking about improving customer experiences and streamlining customer experiences in general, which of course requires technology and it’s something that they should all be thinking about.
As an observer from the outside, I’m relatively optimistic. We haven’t seen any answers that don’t make sense here. I look forward to seeing them, implement all of those things in practice and navigate the environment over the next couple of years.
Megan Eales Monroe: The last few years have had unexpected twists and turns for the property management industry. But both Dror and the nearly 5,000 respondents surveyed for the 2023 AppFolio Property Manager Benchmark Report reveal plenty of reasons to be optimistic, especially with so many opportunities for growth in the year ahead.
I’d like to thank Dror Poleg for being on the show today and providing his expert insights. Also, don’t forget to get a copy of the 2023 AppFolio Property Manager Benchmark Report now.
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