Public REITs can achieve cost savings by outsourcing property-level services, according to a newly released report by CBRE.
The report, based on an internal study regarding third-party property management for public REITs, was undertaken by David Fick, a professor at Johns Hopkins University and former head of REIT Research at Legg Mason Real Estate Group. Its goal was to discover how expanding external property management services can benefit REITs. The study involved a review of CBRE’s relevant company financial data, internal tools, software, management manuals and online systems used to run properties.
As a result of the study, CBRE now believes internal property management for REITS needs a re-examination, according to Drew Genova, CBRE’s executive managing director, based in Washington, D.C.
“The whitepaper is as much about a study of our property management services and benefits as it is about asking public REITs to consider their property management options, internal or external, on the merits of what is most accretive to their overall strategy,” says Genova. “The message is about providing best in class property management services with a key focus on delivering property level savings, increasing asset value and delivering a great experience for the tenants. The goal is to improve occupancy levels and maintain above market average tenant retention rates. “
Here are the report’s six most important takeaways, according to Genova:
- The public REIT sector is rapidly evolving. It recently crossed the $1 trillion threshold in total capitalization. There are many new REITs in registration under the Jobs Act, and public REITs had record industry index investment returns in 2014. Collectively, these events have raised the profile of a once niche sector—yet public REITs still remain committed to doing things “the way they have been done forever,” including property management to be managed internally.
- REITs can save money by outsourcing property management services. In fact, a REIT with less than 10 million sq. ft. in a given market can realize significant efficiencies with professional, third-party, property management.
- Smaller REITs actually lose efficiency—and therefore margin—due to excess capacity at some level, or inability to spread costs across enough sq. ft.
- A REIT with externally managed assets has more flexibility to move capital between property types and locations.
- The scale of a large, specialized management company makes it possible to spread costs for training and development for a fraction of what similar functions would cost a REIT.
- External property-level IT deployment allows a REIT to focus on its investment and portfolio management business, while the external manager maintains the latest in property management technology and software.