Owners of commercial real estate have taken their hits and have learned along the way about the most efficient use of capital. Still, this market has dictated that being profitable means owners are putting an even greater focus on keeping costs down while maintaining service delivery.
“There are two sides to the NOI equation: income and expense. A good property manager is always addressing both sides,” says Kenny Coven, managing director of asset services at CBRE. “It’s in making sure that a given asset out-performs the market relative to occupancy rates, that they’re getting the highest rents that the market will bear and that they are retaining their current tenants while bringing in new tenants. That’s the income side of NOI. On the expense side, you strive to keep expenses as low as possible while keeping the services delivery best of class.”
Smart Business spoke to Coven about how to address the key issues of income and expense in today’s market.
What is the biggest issue faced by owners of commercial real estate today?
If you asked four years ago, it would have been a different answer, but in this economy and with the current credit crisis, it comes down to funding. If they’re in that cycle where they have to refinance right now, especially if they bought in 2006 or 2007 at the peak, they were modeling their building at the then current rent, and property values were at their highest. Since then there’s been downward pressure on rent, there’s been greater vacancy and devaluation of property values. So if they are in the market to refinance today, it’s much more difficult for them, and if they’re looking to spend money on tenant improvements to attract new tenants, it can be very challenging to find those dollars.
Several years ago when a broker took someone out to look at space, there may have been seven or eight spaces that met their requirements; now there are 15-20 potential units. So it’s even more important that the service delivery be outstanding, that you respond to tenants’ needs within hours of when they come up, and that from the time you get out of your car at the curb to when you’re in the space that everything is well kept. In this competitive market, you need to do everything you can to retain your tenants, bring in new ones and keep your expenses down.
What type of building owner should engage third-party management?
Building owners that use third-party management are generally multi-tenant, institutional, or just private owners that understand that, because of our size, our nationally negotiated vendor contracts, the amount of staff that we have and our skill set and expertise, we can manage their properties better and cheaper.
Where a third-party manager like CBRE can be most effective is in cross-selling services. We do the property management, the leasing, the construction management, and provide technical services, i.e. engineers and technicians. All of those different entities are led by different groups, but we’re all under the same roof and the real estate manager becomes the general. When CBRE provides all of the services just mentioned we get a lot of synergies that help in providing a seamless operation.
When should a property owner seek the assistance of a property management professional?
I personally believe that looking at third-party management is probably a good idea for almost any owner. Because of economies of scale and nationally negotiated vendor contracts, we can generally step into most buildings today and instantly bring expenses down 7-12 percent. For example, we took over a half-million-square-foot office property two years ago for a lender that had taken the properties back. The day we stepped in that door, we saved them $1 a square foot on operating expenses.
Often it’s a question of going for a real estate tax reduction. In many cases the single largest component of operating expenses are real estate taxes, and it’s not a difficult argument today based on what’s happened to the value of real estate. In the case just mentioned, however, the $1-per-square-foot of savings was a combination of the reduction in costs of goods and services.
What are some of the keys to successfully managing commercial property?
It’s taxes, its utility costs, it’s any third-party vendor contract such as elevator maintenance, snow removal, landscaping, tenant improvements, etc., as well as supplies used in the building itself.
It’s also understanding the specific needs of that asset relative to the market it’s in as well as the owner’s given strategy, because it’s not the same for every owner. We have some owners that are currently in the market to try to sell their building, which will require a different strategy than someone that intends to own a building 10 years from now. You’re looking at capital expenses and you’re looking at value creation over the next 10 years as opposed to someone who knows they’re going to be selling in the next two to three years.
Are they coming up for refinancing in the next two years? Because then occupancy and the length of the lease is greatly important to them. It may be a case of talking to every tenant whose lease is expiring in the next three years and trying to work out a new seven- to 10-year lease with them now where you give them some savings or maybe some additional tenant improvement dollars. Then when you come up to refinance in two years you don’t have a lot of leases that are rolling immediately.
It’s key to try to stay ahead of what could potentially happen out there, and to figure out what to do to put yourself in the best position to get that space leased when it comes to market.
Kenny Coven is the managing director of asset services at CBRE in Cleveland. Reach him at (216) 363-6436 or Kenny.Coven@cbre.com.