The roller-coaster ride labeled “2008” is over at last. But will its replacement be just as wild? Or are we in for a calmer time in 2009? It’s impossible to know what lies ahead, though any number of “experts” will offer forecasts ranging from a rebound to more gloom and doom. Which will be on the mark, or out in left field, won’t be known until several pages of that new calendar have been ripped off the wall.
But what happens on Wall Street, on Main Street and in the halls of Congress has an impact at the local level—right down to the backyards of New England community associations. For this opening issue of 2009, we asked a group of experts —members of the editorial advisory board of New England Condominium—to peer into the future and offer their predictions for community associations for the months and years to come.
Their responses, not surprisingly, tended to have ties to the current economic situation. Job losses, delinquent fee payments and foreclosures will all affect community associations, as will changing technologies that can streamline administration and bring other economic benefits to condominiums.
So what’s on tap for 2009?
The ubiquitous computer and its connection to the world have brought instant communication and a new means of networking to everyone, including condominium owners and board members. Online transactions of all kinds will spread more widely in the future, our pundits said.
“Despite the recent reduction of energy costs, I anticipate that we’ll be seeing more video conferencing for meetings instead of traveling to properties,” predicted Stephen DiNocco, principal of Affinity Realty & Property Management, LLC, in Boston, Massa-chusetts. “I see a trend toward more web-based services: People can pay fees online, they can report maintenance issues online, track maintenance requests, and vote online,” he said. “More and more associations will be moving toward electronic processing of day-to-day functions of the property. Once you have that—building systems, heat and air conditioning with remotemonitoring, you can be notified of certain problems prior to them developing out of control.
“And I think remote security monitoring of sites will become much biggerthan it is now. To date, boards have often been reluctant to upgrade and update monitoring systems—mostly because of the cost factor. “
How do these diverse electronic issuestie together? At the bottom line.
“Economics will dictate that boards are going to look for more efficient ways to do things. Working online is ‘greener’ in some ways, and more efficient, so they’re going to have to do it,” DiNocco said. Electronic communication and payment of association fees can also cut expenses for the association—and result in better service. “Instead of spending money on postage, copying and all that, there’s no charge if you send things out by email. From that standpoint, you’d reduce office expenses. Then the service levels go up, so you get more for your dollar.”
David J. Levy, PCAMof Sterling Services in Holliston, Massachusetts, agreed that technology is going to play an increasing role at community associations.
“Technology is improving the management office,” he noted. “If you don’t have a high tech ‘back end,’ you’re at a disadvantage.” The days of bookkeepers opening envelopes bearingfee payments may be on the wane—or should be.
“The benefit to the management company is more efficient operations,” Levy said. “The benefit to the unit owners is that they’re not paying for stamps, and if they pay through the ACH (Automated Clearing House) system, they don’t have to worry about paying late fees.”
But there’s more to technology than the financial side of the picture. “I see technology becoming more ingrained in the life of associations,” said Jasmine Martirossian, PhD, an author and lecturer on condominium decision-making. There are benefits to electronic communications—but she also warns of the “downside” to electronic meetings, where “people may just jump on board and make a decision… and they may not consider all the options thoroughly enough.”
People also have to be cognizant, Martirossian says, of the breadth of the “social media”—the sheer numbers reached with the typed word on the Internet. “In the past, if an association had a problem, not many people knew about it. But today, if there’s negative commentary online, it could affect some properties, or some management companies. If you do Google searches, you find negative information pretty quickly. All professional servicesin the industry are going to have to be aware of this social media.” One person with a gripe can impact an entire community, she noted.
Closely tied to current economic woes are predictions about the physicalaspects of communities.
Levy sees problems looming for communities that were originally heavily investor-owned, with many of the units rented and then sold to first-time buyers. “When these properties converted in the 1980s, then again in the early 2000s, the investor-owners sold units to their tenants—and a lot of the tenants were under-prepared to be owners,” he noted. These first-time buyers were often using the now-infamous subprime loans. They may have been able to meet their mortgage obligations, but weren’t really prepared to handle the common fees as well. As their mortgagecosts rise, as the economy tightens, as energy costs skyrocket, there just isn’t enough money available to cover everything.
What happens to these communities? “They start cutting back on services, cancelling replacement projects, deferring maintenance,” Levy said. “We can’t paint the hallways because we don’t have the cash, but because wecan’t paint, the units become harder to sell. Owners can’t rent because the property looks dumpy—it’s a vicious cycle.” If the cycle continues, he said, “a whole group of properties may be destroyed.”
Ralph Noblin, PE, of Noblin & Associates, LC, Consulting Engineers, in Bridgewater, Massachusetts, fears that associations will look for quick fixesto building needs. And, he predicts, those shortcuts are not going to serve the communities well.
“In the best of times, condominiums don’t relish having to do these constructionprojects—but real estate needs maintenance,” Noblin said. When times are not the best, repair projects breed even more displeasure.
“We’re already getting to some meetings where people are saying, ‘we can’t do this now.’ And some associations, unfortunately, are saying, ‘we’re only going to do the absolute worst areas: replace those clapboards with new clapboards, those old white cedar shingles with new white cedar shingles,’” Noblin lamented. “What that does is draw attention to the old stuff. I think a property actually looks worse with spot repairs than with no repairs at all.”
So in the months and maybe even years ahead, Noblin said, “I anticipate seeing more deteriorated buildings.” It’s a prediction he hopes is wrong, however. “You can’t afford not to do these repairs. People are kidding themselves if they settle for living in homes that are that questionable in appearance.”
Bob Burns, PE. an engineer and reserve specialist at Burns and Associates —Engineers in Portsmouth, New Hampshire, anticipates that boards and homeowners are going to take a closer look at those maintenance issues—hopefully with an eye toward staving off the kind of problems that concern Noblin.
Burns’ company has begun tying three of our key issues—technology, finances, and property maintenance —together in an “interactive” reserve study system. Instead of simply preparing a static reserves report, he said, the engineers now prepare a spreadsheet that can accommodate “what-if” scenarios as a property changes and ages. “So if the cost of oil rises, for example, you can change it and see ‘what ifs’ at new price” when considering replacing roofs or roadways.
Burns predicts that self-managed associations will be looking more and more toward bringing in experts to ensure that every penny spent is spent wisely. “In tough economic times, people want to take a look at where the money is going,” he noted. “Whatwas an easy decision before, when money was easy, isn’t now; that light is dawning on self managed condominiums as well.”
And, he thinks, boards will begin to look more closely at maintaining the property—by crack-sealing roadways, for example—to stretch the lifespan of property components.
And boards had better pay attention to their property’s condition because banks will be paying attention, according to attorney Seth Emmer of Marcus, Errico, Emmer & Brooks, PC, in Braintree, Massachusetts. “I think there’s going to be a focus and emphasis on appropriate financing of associationsgoing forward, because a lot of places are reaching the age where they’ll have major expenses. If they don’t have the money, they’re running out and borrowing, and banks are still lending for associations.
“The challenge going forward is thatthese buildings are at an age where they’re due for major expenses: roofs wear out, roads start to go—they’re all big ticket items.
“The problem is that associations have never really properly budgeted from day one. The (Massachusetts) statute says they have to have ‘adequate’ reserves—but you can always consider special assessing. The banks wanted to see cash on hand for foreseeable needs, and I think that is something that is going to get pushed,” he predicted.
David A. Levy, CPA, of Brookline, Massachusetts, said he sees associationsmoving more quickly on late monthly fees. “I see them monitoring the receivables very closely, using attorneys more for quicker notification to owners, because units can go quickly to foreclosure,” he said.
“I think we’re going to see more foreclosures. But the healthier associations—that have been budgeting for reserves and contingencies—are going to do OK,” he said. “I think we’ll see in the first quarter of ‘09 the real effect of this market downturn. But if you spot it quick enough, you might be able to adjust your budget. If receivables are growing, you might have to adjust the budget for potential loss—and the rest of the association will have to pick up the difference.
“In an association, we all subsidize one another. When people don’tpay their share, it’s a real problem.” Fortunately, he said, many associations learned from the disasters of the 1980s and now have at least some reserve money tucked away. “Unit owners may not be in better shape than they were then, but I think the associations might be.”
And as associations watch their pennies, they should prepare for a tightening of the insurance market and some small increases in insurance premiums. “I think premiums will be pretty stable, but some companies will be putting in increases of maybe about 5 percent,” said Bernie Gitlinof Global Insurance Network in Needham, Massachusetts. Last year’s hurricane season dealt a blow to the reinsurance companies, and they’ll be looking to make up some of those losses in the future.
“Reinsurance treaties for insurance companies come up twice a year; a lot come up on January 1,” Gitlin said. “In January, the reinsurers will decide how much they’re going to squeeze from the insurance companies. A number of them come up in June, so some may still be aggressive for six months.” At the same time, he noted, companies recognize that “it’s not nice to raise rates when people are having trouble,” hence his prediction that increases will be minimal this year.
But community associations are more than buildings—they’re communities of people, governed by laws and regulations. Attorney Henry Goodman of The Law Offices of Goodman, Shapiro & Lombardi, LLC, in Dedham, Massachusetts, is among those who remember the condo financialtroubles of the 1980s and ‘90s—and the effort to solve those problems through the 1992 passage of the “Super Lien” law in Massachusetts, which gave condos the right to impose a priority lien on owners who didn’t make common area payments.
Goodman, who helps draft and promote legislation through several condominium industry trade group committees he sits on, sees a new round of condo-relatedlegislation coming down the road.
“There is no bright line between what constitutes an improvement, requiring a vote of the unit owners, and a change that is a repair or maintenance, requiring a vote of the board,” he said. Another key issue facing someassociations relates to low-income housing and changes that occur when a low-income unit becomes a market-value unit. “These issues have been simmering for a while, and legislation may be filed in the near future,” he predicted.
Pat Gale, associate editor of New England Condominium magazine, is a freelance writer in north central Massachusetts.