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Part 1: Rents Drop, Demands on Property Managers Rise
By Greg Zimmerman, Executive Editor
July 2009 -
Right now, all over the country, vast tracts of commercial office space are sitting empty. The national average office vacancy rate has leapt to 14.7 percent, according to CB Richard Ellis, largely because leasing activity has practically screeched to a halt. Landlords are slashing rents in the hopes of luring new tenants nearly as quickly as they’re losing bankrupted tenants to default. Nationally, rents dropped an average of 2.2 percent between the fourth quarter of 2008 and the first quarter of 2009, according to Cushman Wakefield.
Many experts say the market hasn’t been so dire since the real estate bust of the early 1990s, when vacancy rates approached 20 percent across the board — an all-time high. But if this recession has had one positive effect, it’s that landlords are once again realizing the importance of top-notch property management.
“Good management has come back in vogue,” says Marc Fischer, senior vice president, property management for Transwestern. “In the past, if you could cut expenses and keep the place from burning down, you could sell it for more than you paid because prices kept artificially rising.”
But that’s not the case anymore. “The days of flipping buildings and leaving the leaky roof as a problem for the next owner in a long line of owners are gone,” says Richard Purtell, portfolio manager for Grubb and Ellis, and former chair and chief elected officer of the Building Owners and Managers Association (BOMA) International. “Excellence in today’s market equates to excellence in property management.”
With the spotlight shining brightly, property managers are doing everything they can to capitalize on their newfound prominence. Similar to facility executives in owner-occupied facilities who earn a seat in the boardroom and the ear of C-suiters by instituting measures that add value to their organizations, property managers who can figure out how to reduce costs without reducing tenant satisfaction are more valuable now than ever before.
“Property management hasn’t fundamentally changed,” says Dan Pufunt, national director of property management with Jones Lang LaSalle. “The most important thing is maximizing the net operating income for our clients.”
But while the fundamentals haven’t changed, the recession has certainly forced some evolution. These days, the skill set expected by landlords to maximize net operating income has moved beyond preventive maintenance or hiring the best cleaning contractor.
Property managers are taking on a much more consultative role with their client landlords in financial aspects; everything from helping to vet potential tenants for creditworthiness and long-term viability to knowing how to help a landlord recover some cash if a tenant goes bankrupt and defaults on a lease.
“The focus for property managers is moving from day-to-day management to actual cash flow management and management of financial data,” says Randy Buddemeyer, managing director of asset services for the Florida office of CB Richard Ellis. “Many real estate professionals with financial backgrounds are stepping up these days. It’s always important to shuffle people around a bit to make sure those with the right backgrounds are in the right positions.”
Pufunt agrees: “Property managers are now really thought of as asset managers by the owners. Owners don’t want just a brick-and-mortar operations manager anymore. They rely on us as an advisor.”
Landlords are asking their property managers to keep them apprised of what is happening with their tenants as well. Property managers have always served as a sort of liaison between landlords and their tenants, but that role is taking on a greater urgency now because property managers are in the best position to support what has become landlords’ No. 1 priority: retaining current tenants. The reason tenant retention is at the top of the list is simple: Recruiting and then doing tenant improvements for new tenants is costly and difficult. Retaining existing tenants is relatively inexpensive and easy.
For landlords, long-term leases are the Holy Grail because they represent fairly reliable, long-term cash flow. They also make a building more valuable. But in this economic environment, many tenants are waiting to make long-term leasing decisions until the economy shows signs of picking back up.
“The leasing side of the market is stagnant right now because there’s so much uncertainty,” says Buddemeyer. This means that, for all intents and purposes, tenants that are willing to make leasing decisions now are holding most of the cards.
For existing tenants, however, the property manager’s job is to dote on tenants and keep them happy. Property managers often find themselves in the role of facilitating compromises. Landlords certainly understand that many tenants are struggling in their businesses, too, and have had to cut costs and downsize their personnel. If a tenant falls behind on rent, often it’s the property manager who should see if a solution can be forged. Not having to pay for space they are not using anymore could be the difference between a tenant making it and going under, so rather than lose a tenant for good, landlords are sending in the property manager to help negotiate.
“If a tenant needs to give back some space, we’ll go to the owner to make recommendations,” says Pufunt. “We always need to work closely with the tenant to find a solution.”
Pufunt suggests a few possible solutions, including subleasing space or negotiating a lease renewal now for less space if the current lease is near the end. “Maximum flexibility is important,” he says. “If it’s a good tenant, we’re willing to work with them.”
Property managers also need to make it their business to know about their tenants’ hot buttons, requests and questions. Two ways to do this are tenant satisfaction surveys and tenant councils. Most property managers do tenant satisfaction surveys whether the economy is booming or busting, but many say that they’ve stepped up the frequency lately. Pufunt, for instance, says he plans to survey semiannually (even more frequently, for some tenants) now instead of annually.
“I’ve always been a big proponent of tenant surveys, but they’re even more important today because of the heightened pressure on tenant retention,” says Buddemeyer. “The surveys provide direct feedback.” Surveys provide a swath of tenant opinion and can give property managers a good idea of whether they are making the tenants happy.
Even the most effective survey in the world, though, pales in comparison to the importance of regular face-to-face conversation. Experts suggest tenant council meetings as often as once per month. These meetings, at which the property manager presides, should include a representative from each tenant, the landlord and key service providers.
“If there’s more frequent interaction by the property manager, better service is possible, and there will be more tenant renewals,” says Fischer. “If you don’t communicate with tenants, someone else will as they’re escorting them out of the building.”
The tenant council meetings are a prime opportunity not only for an airing of grievances, but also to identify areas of collaboration among tenants — a strategy that can cut costs for everyone. For instance, says Buddemeyer, “one thing to look at is security. Would it be possible to reduce a guard or change operations to reduce the time a guard is needed?” Especially now, property managers can’t just dictate decisions like that in a vacuum. Tenants have to feel as though they’ve had their say, he says.
Tenant council meetings are also a chance to take suggestions on improving operating efficiencies, and to explain what the property managers have been working on in terms of reducing costs and implementing energy efficient strategies and other green initiatives.
“If a tenant is in a high-performance building, but doesn’t know what you’re doing to make it high-performance, you have a problem,” says Purtell. “Communication is key. Give evidence you’re operating a high-performance building compared to the competition. There are many other options out there.”
Sometimes it’s hard to convince tenants who are signed to gross leases to care about operational cost reduction strategies. If they aren’t paying the energy bill, what do they care about the efficiency of the HVAC system?
Recently, however, there seems to be a shift — tenants, partly due to the efforts of property managers, are realizing that there isn’t a lease in the world that doesn’t benefit them in some way if they’re in a more energy efficient building. Even if tenants don’t believe the common claim that a more energy efficient building results in lower rental rates (because landlords paying less operating costs can charge less rent and still make the same or better profits), tenants are increasingly looking for green and energy efficient space as a recruitment tool for their own employees.
Pufunt, as one example, says he was recently working with a tenant looking to lease 400,000 square feet in Houston. The tenant wouldn’t even consider the proposed building unless it gained a LEED certification, he says.
Another part of the efficiency equation is benchmarking. More and more, property managers are using Energy Star Portfolio Manager to track energy use and compare with their peers.
“If you’re not benchmarking, you’re leaving money on the table,” says Fischer. “We need to strive for Energy Star in our buildings. In the past, it was hard to get clients to think about Energy Star and sustainability, but now it’s huge.”
Also, with an energy bill being debated in Congress that would cap greenhouse gas emissions, property managers are making the next step from energy costs to carbon emissions. A vast majority of carbon emissions in commercial office space are Scope 2 — resulting from electricity produced at fossil-fuel burning power plants. And while it’s still a bit unclear who — whether landlord or tenant — will “own” a facility’s carbon emissions under cap and trade, the best way for property managers to reduce emissions is to reduce energy use.
For many property managers, the ideas of efficiency and sustainability aren’t new — they’ve been standard operating procedure for a while. But as Purtell says, it’s certainly no time to get complacent: “Property managers are definitely on board with green strategies. They have to be part of our operating strategy these days.”
Simply put, property managers have to constantly stay ahead of the curve. Not only is their livelihood at stake, but saving a few dollars here and there may be the difference for a landlord. Good property management is more valuable than ever.
The recession may not exactly have created a golden age for commercial real estate, but it definitely has created a golden age for property managers who are adept at earning the best possible value for landlords.
Vacancy rates rose in nearly every major city in the first quarter of 2009. The national average rose 1.3 percent.
San Francisco, New York and Boston all saw rental rates per square foot plummet. Nationally, rent dropped 2.2 percent.
Property Management During The Recession
Part 2: Property Managers Can Reduce Costs By Cutting Saturday Hours