Big apartment landlords lean in to AI and proptechs as profit squeezes loom

ChatGPT and its artificial intelligence have been infused with the cultural zeitgeist since November. But some big US landlords were already waist-deep in labor-saving technologies of their own to ward off profit squeezes, like the ones many are facing today.

At Equity Residential, the sixth-largest apartment owner in the US, with more than 79,000 apartments, AI is helping it tackle tenant management so efficiently that some of its customer-service jobs have “disappeared,” CEO Mark Parrell told hundreds of real-estate professionals gathered in New York last week. The technology, he said, handles as much as 90% of all inquiries from current and prospective tenants.

Essex Property Trust, the owner of 62,000 apartments, has been busy convincing its shareholders that using tech is a path to better profit. It’s also focused on applying tech to leasing, in this case by using the leasing software Funnel to “meaningfully accelerate the timetable to turn prospects into renters,” CEO Angela Kleiman said on a company earnings call last year.

It’s also focused on applying tech to leasing, in this case by using the leasing software Funnel to “meaningfully accelerate the timetable to turn prospects into renters,” CEO Angela Kleiman said on a company earnings call last year.

The two publicly held landlords and others like them are directing greater attention to their AI and other tech, casting it all as a saving grace in today’s tougher earnings environment, where rent increases are harder to come by and rising interest rates are increasing other costs. For those already relying on tech to boost efficiencies, they’re painstakingly calculating their returns on the investments to justify the expenses, said John Helm, the managing director of RET Ventures, a venture-capital firm that raises funds from institutional landlords and invests in tech that can help them.

“When things get tight like this, people focus on companies that can help reduce operating expenses.”

— John Helm, RET Ventures

“When things get tight like this, people focus on companies that can help reduce operating expenses,” Helm said.

On the supply side, the race has been on for some time to sell landlords on tech that works. To some providers, the writing was on the wall that easy money was drying up.

“Quite often, you need a forcing function for change, and more often than not, it’s actually distress or a limitation of resources,” Austin Lo, the CEO of the virtual-tour and self-touring company Peek, told Insider.

In this case, landlords are adapting to today’s higher interest rates from a time when borrowing costs were low and taking any pressure off operations, he said.

The squeeze

Indeed, easy times are over for commercial real estate, at least for now, even in the buzzy multifamily sector. Rising costs hit margins hard and make it harder for landlords of all sizes to hit their expected returns, or even pay their debt.

“There’s a need. There’s a squeeze. And everyone grew so fast that the stretch marks are starting to show,” Tripty Arya, the founder and CEO of the AI-property-management firm Travtus, which she said has helped some operators cut costs.

Even big landlords seen as the gold standard of real-estate investing are feeling it. Blackstone, considered the world’s largest property investor, is in danger of defaulting on a $270 million loan backed by 11 New York apartment buildings, The Wall Street Journal reported, citing Moody’s Investors Service. Even though rents have soared 20% in Manhattan since 2019, maintenance and debt costs are hurting cash flow to the point where a distressed debt manager has been engaged, the report said.

The real-estate-data firm Trepp found that in Washington, DC, 71.9% of properties financed with a type of risky, short-term debt — and whose owners had plans to improve the properties so they could raise rents — weren’t earning enough to cover those loans, let alone their property-management costs.

“People are looking at their operating expenses and asking, ‘What levers can we pull to offset the interest-rate increases and to offset the insurance costs?'” Avery Solomon, a senior managing director at Cushman & Wakefield who works in the firm’s division for residential-property management, said.

How to save

One of the best ways to save money is to stop operating each property like a separate business.

That legacy business model leads to major duplications of efforts, Helm said, adding that landlords were turning to the more efficient process of combining the property-management costs of multiple buildings. That reduces staffing needs in an industry notorious for its high turnover, he said.

“One of our investors used to have 11 people working on Saturdays in a location to facilitate tours, and now they just have one,” Helm said. “That was pre-COVID. You can’t find 11 people to do that job anymore.”

On the Essex Property conference call, Kleiman was effusive about tech. In addition to tech’s help in leasing, Funnel was generating data that could help improve the “quality” and “effectiveness” of customer interactions, she said. SightPlan, software that helps with maintenance requests, was reducing the turnover time for units by 10% year over year in the fourth quarter “despite COVID-related labor challenges,” she said.

Funnel also helped play a role in Camden Property Trust’s transformation to a more centralized operating model, Funnel CEO Tyler Christiansen told Insider. Camden’s CFO, Alex Jessett, said on the company’s first-quarter 2022 conference call that the model would save the apartment real-estate investment trust $4 million to $5 million a year.

Camden’s CFO, Alex Jessett, said on the company’s first-quarter 2022 conference call that the model would save the apartment real-estate investment trust $4 million to $5 million a year.

Equity Residential’s Parrell said the company’s use of AI — which it developed internally — had reduced the need for some customer-service jobs, though the IT workers who run that tech are higher-paid professionals. In the end, “our residents love it, and it actually has a higher closing ratio than our living, breathing, physical leasing agents do,” he said.

The results for balance sheets — which aren’t always top priorities of otherwise good businesses — are crucial because accounting is “sort of a pass-fail test,” Parrell said.

“If you end up on the wrong side of that, you can get really hurt,” he added.

When customers come calling

Landlords looking for cost savings are driving proptech companies to create products. When Lo founded Peek in 2019, remote apartment tours were of interest to some tenants, but fully remote leasing seemed unlikely. Then the pandemic happened, and the company’s product found traction.