Role Played

The person running an asset day to day, almost always the property manager, is routinely hired with little rigor and paid on a transactional fee structure. Then, when the asset underperforms, ownership is surprised. The current candidate or party gets dismissed and, less a thorough analysis of went wrong, in comes another. No serious operating company would treat a COO role is this manner or price it like a vendor invoice, but real estate routinely does.

For decades, real estate returns came from buying right and riding the market: cap rate compression, rent growth, leverage. That model is breaking down. Operations is no longer a side function, and the capital markets know this. Across the real estate industry, value creation is shifting from market beta to operational alpha, with outcomes increasingly driven by manager execution at the asset and sub-asset level rather than rising valuations or favorable cycles.

Internally managed real estate investments outperformed core benchmark indices by roughly 80 basis points per year from 1998 to 2022 — a persistent, multi-decade edge for structures that keep operating control close rather than handing it off through layers of delegated, fee-based management. The segments of institutional portfolios offering greater operational control —joint ventures, separate accounts, and operating companies— have consistently outperformed structures with limited control, such as commingled funds and capital is fast adjusting to this reality.

The "buy it, don't build it" logic now playing out across data centers, senior housing, self-storage, and cold storage is the same insight scaled up: rather than buying buildings and hoping a third party runs them well, capital is increasingly buying into the operator itself. The reasoning is structural, not superficial. Firms that embed real operating capability into core workflows are positioning themselves to take share in a market that now rewards execution over market timing. Institutional capital willingness to underwrite the value of the operator as a standalone asset, is a tacit admission that operations are not the cost center the org chart implied.

Priced like the part of the business nobody's betting on, property management hasn't caught up to that admission. The clearest evidence being the capital reserve number sitting in the underwriting model. Multifamily underwriting has used roughly $250 per unit per year in replacement reserves for more than a decade — it's the figure agency and HUD lenders default to, and it shows up across most pro formas as the standard. HUD 223(f) loans require a minimum of $250 per unit per year in replacement reserves, and that figure has functioned as de facto gospel. But operators, living the asset reality, aren’t believers. While lenders typically use $250 per unit for routine replacement expenses, experienced operator know that number is closer to $500–$750 per unit. This is not a rounding error. It's a structural underwriting gap that widens, deferring maintenance as it does. That's what it looks like when an asset's actual operating function has no seat at the table where capital decisions get made. The cost of which isn't just deferred maintenance but monetization left on the table: assets that are stabilized, fully leased, and still leaving real revenue unclaimed because management's mandate stopped at occupancy.

Dormant Amenities is a clean illustration. The standard practice in Class A multifamily is to capitalize $8,000 to $18,000 per unit in amenity infrastructure at delivery — a multi-million-dollar position on a few hundred units — and then treat that infrastructure as a static brochure feature rather than an operating asset. The fitness center is open, the rooftop is accessible, the courts are there — but what they're producing as a business matter is given the same rigor as the management hire.

The market signal underneath this is real. Registered pickleball players in the U.S. grew 14.8% year-over-year to 36.5 million by 2023, the average annual cost to maintain a court is around $1,800, and 68% of renters say on-site social programming increases their likelihood of renewal. Those three facts sit in three different departments — marketing, facilities, resident services. Who connects them into a revenue strategy? Properties with active resident programming show a 2.4x renewal rate advantage over passive-amenity-only properties, and the average cost to turn a unit —cleaning, downtime, re-leasing— runs around $4,200, a cost that retention largely eliminates.

This root cause is the same as the reserve problem, just pointed at upside instead of downside. The mandate most property managers are operating under —lease it up, keep the trailing financials clean enough for a recap or refinance, avoid complaints— is narrower than the title implies and is achievable without ever asking the $4M amenity investment question. What is the return on amenities? It's a COO-level question the COO-level role was never staffed, incentivized, or empowered to explore much less ask.

It's tempting to think operationally intensive real estate —multifamily, senior housing, self-storage— is a special case and that something like a single-tenant net-lease industrial building proves the thesis wrong, since there's no on-site manager making consequential calls. It doesn't. It proves the opposite. A net-lease asset still requires COO-caliber operating decisions, maintaining the building, managing capital cycles, running the actual business inside it. That responsibility has been contractually assigned to the tenant. The lease structure and rent reflect that reallocation. 

Someone is always running the asset at an executive level. The deal structure just determines who, and the rent accounts for the risk and responsibility shift. 

Hospitality is the asset class that has internalized this most fully — not because operations matter more there, but because the industry built real selection rigor around it: brand-managed agreements, GM-level scrutiny, performance clauses tied to outcomes rather than just occupancy. Hotel operators have understood for decades that an amenity like a pool is social infrastructure that drives ancillary revenue, and they track revenue-per-available-amenity-hour with the same discipline applied to revenue-per-available-room. Multifamily, office, retail, with comparable operational intensity, never built the equivalent hiring and incentive discipline; largely because fragmented ownership means no one holds the asset long enough, or owns enough of the P&L, to justify building it.

While unfamiliar, the fix is not complicated. It requires treating the property manager's seat the way the rest of the business world treats a COO seat: hire with real diligence, compensate against asset performance, and govern the departure with the same scrutiny given to the arrival. A COO doesn't leave without an exit interview that interrogates what happened to the business. Neither should a property manager whose exist leaves behind is a paper trail —a T-12, a deferred maintenance list, a vacancy schedule— with trailing context and contextual gaps.