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.
When selling or leasing a building, the small things can make a big difference in whether someone chooses your building or moves on to the next one.
A commercial real estate agent can help you identify problem areas that will have a significant impact on how quickly a transaction takes place and how much any enhancement will add to the bottom line, says George J. Pofok, CCIM, SIOR, senior vice president of CRESCO Real Estate.
“In order to maximize the value of your property, it is extremely important to make sure that it shines on the initial tour,” says Pofok. “The first impression is most critical.”
Smart Business spoke with Pofok about how to improve your property to increase your odds of selling or leasing and maximize its value.
How can a building owner improve a property for maximum return on a sale or lease?
For an example, in an industrial building recommendations would include painting the office area a neutral color as well as painting the walls and ceiling in the warehouse area white. This will create an impression of a vibrant and clean environment. Ensure all lights are in good working order or consider upgrading to more energy-efficient T-5 fluorescent lighting. If you have older carpeting, steam clean it to remove the dirt and stains so it shows better.
If you had a roof leak in the past, replace the ceiling tiles that show any evidence of a previous problem. The leak may have been five years ago, and you may have since replaced the roof, but someone will look at the tiles and assume you have a roof problem and automatically start discounting the price. Make sure the overhead doors open and shut on truck docks and drive-in doors along with ensuring the dock levelers and seals are in good shape.
It’s the little things that really matter. If someone comes in and sees even these small deficiencies one after another, they’ll either want to reduce the price immediately or they may just move on to the next property. Making the improvements up front helps eliminate any questions the buyer may have.
What can you do outside the building?
The outside of the building is just as important as the inside. Most owners feel their building is a direct reflection on the company. A few improvements to consider completing before listing your property would be to paint the exterior, seal coat and restripe the parking lot and add landscaping. You will often be able to achieve a higher purchase price as a result of these types of small improvements. It will also help show potential buyers that the property has been maintained over the years.
If you have an industrial facility with miscellaneous junk laying outside, get rid of it. Chances are you haven’t used it in years and you’re not going to use it, and all it does is show poorly. If you must store product outside, make sure it is stored in neat, presentable order, potentially in a fenced storage area.
In a slower market, you need to differentiate your building from the next building. As a result of economic conditions, values have decreased, and you’re not going to achieve the same price per square foot on some buildings that you could have five or six years ago. So anything you can do to make sure your building shows well is very important.
How can a commercial real estate agent improve your odds of selling or leasing?
A real estate professional can implement a specific marketing plan targeted toward users that best utilize the building’s amenities and strengths, which will help improve the building’s position within the target market. And because he or she knows what properties are in the market already, that gives you an advantage, versus someone trying to sell on their own who doesn’t have any real estate experience, including real time market knowledge and trends. An agent is in the market every day and has listings throughout the region. This provides them the ability to cross reference prospects amongst a variety of different buildings.
How can a building owner find the right agent?
The first thing to ask is what kind of experience that person has. Ask how many transactions the agent has completed in your specific market and ask for detailed case studies.
The next questions would be, ‘How do you anticipate marketing my building? What do you do differently from your competitors in terms of marketing?’ Everyone can put a sign up on a building, and everybody can post it on the Internet, but you want someone who is going to go beyond that, someone who does a lot of street pounding, a lot of follow-up phone calls to mailers and who is extremely active in various organizations, which will help provide leads.
You also want someone who will communicate with you, even when they don’t have anything to report. Finally, you need to be patient and understand that securing a sale or lease may take some time. Overall, the market in Cleveland is improving and activity is increasing, but it can still take some time.
Can a building owner speed up the process?
For a sale, having documents such as surveys, environmental documents, appraisals and maintenance records readily available for potential buyers helps eliminate lot of the questions and can shorten the due diligence phase. Having these things can speed up the process and eliminate the unknowns.
Run the title work on your property to make sure there are no liens, easements or any other encumbrances that could affect the property. You want to make sure that when you receive title commitment during the due diligence process that the title is clean and you don’t have to worry about getting any other releases. If your agent has all of that information up front and can speak intelligently about the building, it instills confidence to the buyer and will help move the process along.
George J. Pofok, CCIM, SIOR, is senior vice president of CRESCO Real Estate. Reach him at firstname.lastname@example.org or (216) 525-1469.