Office building owners over the last three years have had little choice but to become models of operating efficiency to weather the economic downturn. By embracing technology, real estate investment trusts (REITs) and other owners are more effectively responding to tenant requests.
They've also become adept at maintaining building equipment systems, which in turn reduces the likelihood of costly repairs and tenant complaints. And they're accomplishing this goal with less property management personnel than in days past.
The increased efficiencies have generated hundreds of millions of dollars in cost savings amid the sluggish office leasing environment — one that doesn't appear to be improving anytime soon given the U.S. Department of Labor report that an uninspiring 32,000 jobs were created in July. Moreover, say building owners, technology's benefits are also a crucial part of their tenant retention strategies.
To a company like Equity Office Properties Trust of Chicago, which estimates that a one percentage point drop in average occupancy across its portfolio represents a $30 million to $35 million dip in annual net operating income, failing to re-sign tenants is the biggest inefficiency of all.
Equity Office, the largest office landlord in the U.S. with 120 million sq. ft. in 700 properties nationwide, used technology, a revamped procurement strategy and a new managerial reporting structure in launching a $20 million overhaul of its property management function in 2002. Overall, the REIT reduced personnel by 15% and consolidated 169 management offices into 48.
The upshot? Since rolling out the program, Equity Office has saved some $100 million and is sharing those savings with its tenants. The REIT informed 72% of its tenants last fall that they could expect lower operating expenses this year compared with 2003, says Peyton Owen, COO at Equity Office. In addition, Equity Office anticipates that operating expenses will increase for only 1% of its tenants this year and hold steady for the remaining 27%.
Meanwhile, the company's tenant retention rate is more than 60% for the first half of 2004 — in some markets it's 70%, Owen says. That figure is up from 57% last year and 48.5% in 2002. “The reality is that our customers want safe, comfortable environments,” he says. “They want us to provide the basics impeccably well, and that's what our model is designed to do.”
Clearly, Equity Office's program marks a substantial departure from traditional property management operations. Property managers now work together in one location instead of working out of the buildings they oversee. In fact, property managers generally are responsible for more than one property within a city. The REIT's markets fall into one of 10 regions; the Chicago region, for example, includes 35 buildings and 14 million sq. ft. in Chicago, Indianapolis and Cleveland.
But isn't removing property managers from buildings counterintuitive to the REIT's mission to improve customer service? The company claims that by turning over accounting and other tasks to administrative teams based in regional command posts, it has freed up property managers to spend more time interacting with tenants.
“We're shooting for our managers to be in the buildings 60% of the time to make sure they're in front of our customers on a regular basis and are anticipating their needs,” Owen says.
On the other hand, building engineers who respond to tenant calls are still located full-time within the REIT's buildings. Using Angus Systems Group software, tenants can send work-order requests online to the engineers, who receive them via a text message on their phones. Tenants and Equity Office supervisors then track the status of the request online. Customer service representatives in the 10 regional command centers also respond to requests and have leases and other tenant documents available.
In addition, Equity Office has created teams that exclusively perform preventive maintenance on buildings in a respective city. That's also a departure from the past when building engineers responded to tenant calls and in their spare time maintained the structures. Aided by technology, this endeavor, too, has yielded results.
In June, the team responsible for Atlanta buildings dug into reports generated by the software and discovered that the 347,000 sq. ft. building at 245 Perimeter Center had an abnormally high number of tenant complaints about hot or cold conditions. The maintenance team recalibrated some 300 thermostats and also corrected problems with the HVAC's control system.
Yet the team also discovered that a few particular tenants made most of the calls. Further investigation revealed that the tenants exceeded the heat load capacity of the space — either they had added more equipment or people, or both, than the office was designed to accommodate comfortably.
Working with the tenants, Equity Office was able to solve the problem by adding cooling capacity. As a result, complaints about hot or cold conditions in the building dropped 50% in the month after the team's visit. “Because Angus was capturing all that data, we were able to go into that system and discover the problems,” Owen says.
Of course, the Equity Office approach isn't the only way to achieve cost savings. Executives with other leading office owners, including CarrAmerica Realty Corp., Mack-Cali Realty Corp., Hines and The Shorenstein Co., all remain dedicated to housing property managers in their buildings. Yet their zeal for using technology to cut expenses and build better relationships with their tenants is just as evident.
San Francisco-based Shorenstein, which owns 24 million sq. ft. of office space in markets such as San Francisco, Chicago and New York, has invested some $6 million in new technologies in the last five years. One of those technologies is Workspeed, which enables tenants to click on a computer icon and send a work order to a facility worker's hand-held computer, or personal digital assistant (PDA). Workspeed also schedules maintenance on a building's systems and houses the relevant documents concerning the equipment.
Technology, along with an aggressive renewal policy, has helped stabilize Shorenstein's tenant retention rate between 83% and 85% over the last several years, reports Stan Roualdes, executive vice president for property management and construction for Shorenstein.
Renewing tenants also helps landlords save on costs. Landlords spend some $60 per sq. ft. to improve space for a new tenant, Roualdes estimates. But tenants who renew leases typically only need minor improvements to their space, such as new carpeting. At about $9 per sq. ft., the cost for these upgrades is minor.
“In a down market, tenant retention is king,” Roualdes says. “Not only does technology provide for tenant retention and improved customer satisfaction, but it also helps us evaluate our own performance.”
Certainly there's no dearth of technology offerings targeting real estate. While Equity Office and Shorenstein use Angus and Workspeed, respectively, Houston-based Hines uses Database International Group's Aware, and Washington, D.C.-based CarrAmerica uses Essention's InfoCentre. Similar technologies provide solutions for other operations from accounting to energy management.
In fact, since 2000, CarrAmerica has used a system called EnfoTrak that processes the company's utility bills and tracks its portfolio's energy consumption. In turn, that has helped CarrAmerica control energy costs, says Richard Greninger, managing director of operations for CarrAmerica.
But CarrAmerica, a REIT that owns about 24 million sq. ft. in 13 markets, also uses the system to curb costs. EnfoTrak helps the company buy cheaper power in the deregulated markets in which it operates, such as Southern California, Chicago and the Washington, D.C. area.
All told, those energy-related savings amount to some $1.5 million a year. When combined with the savings provided by other technologies, CarrAmerica is able to cut operating expenses some $3.5 million a year, Greninger says.
Greninger identifies tenants as one of the main drivers behind CarrAmerica's decision to pursue new technologies. He says the company has received favorable feedback. “Customers were saying, ‘Hey, we're paying the bill for most of the services in these properties, and to the extent CarrAmerica can save money, we can save money,’” Greninger says. “Technology has helped us achieve that objective.”
But technology isn't a panacea for all of real estate's woes. In some cases, implementing a system makes as much sense as swatting at a mosquito with a sledgehammer.
One example involves Workspeed, says Mitchell Hersh, CEO of Cranford, N.J.-based Mack-Cali, an office REIT that owns 30 million sq. ft. primarily in the Northeast. Mack-Cali made an investment in Workspeed in 2000 along with Shorenstein, Vornado Realty Trust and Archon Group, among others. But while the application performs well in high-rise, high-density buildings, it doesn't make sense for less-populous suburban buildings, Hersh says. “The volume of calls are lower in those buildings, so there's less of a need for that amount of sophistication,” he says.
That experience hasn't soured Mack-Cali on technology, however. The company invested in Integrated Business Systems, which provides solutions for accounting and general property management functions, such as lease administration, financial statements and construction management.
Hersh declined to identify the savings that technology has helped to generate, but he says that it has led to a 15% reduction in personnel over the last five years. In addition, Hersh says technology also can help companies expand with greater ease.
In June, for example, Mack-Cali entered into a 13-building, 2.5 million sq. ft. transaction with AT&T valued at some $91 million. The REIT acquired two New Jersey properties totaling more than 1 million sq. ft. — a four building, 670,318 sq. ft. complex in Piscataway and a 475,100 sq. ft. building in Morris Township — and assumed a portion of AT&T leases at other buildings in New Jersey and Staten Island.
“The message here,” Hersh says, “is that because of our efficiencies from a technology perspective, we feel very comfortable adding to our portfolio and integrating these systems quickly and efficiently.”
Joe Gose is a Kansas City-based writer