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Profit potential

Property managers provide more than just space these days, as new services yield new profits.

There was a time when all you could expect from landlords was the space to plant your business - four walls and a monthly call for the rent. Now, a new era has dawned in the highly competitive world of property management. These days, the talk is all about services. At least in office high-rises, landlords may provide everything from telecommunications services to laundry pickup.

The menu - including everything from broadband to concierge services - is all the rage in office buildings. For property managers and building owners, a new service perspective represents a new opportunity not only to generate new streams of income, but also to keep tenants happy and, more importantly, in their space.

Managers also are looking for ways to maximize revenues produced by industrial and retail properties with varying degrees of success.

"There's certainly opportunity to increase revenue for our owners with non-rental space," says Scott Bodin, director of property management for Dallas-based Trammell Crow Co. "We are looking heavily into the telecommunications area. There are a variety of different avenues we look at according to the product line - retail, industrial and office."

Good for owners and tenants, too The variety of services outside of those strictly derived from rent are as vast as property managers' imaginations and the demands of their tenants. Everyone is beginning to recognize that tremendous opportunities exist to boost the bottom line in both tangible and intangible ways.

Some property management companies see great potential for revenue.

"In the next few years, probably 25% or more of building income will be from sources other than rent," asserts Mike Burson, vice president of property management for Atlanta-based Carter and Associates- ONCOR International. "In order to get to that point, we're looking at all sorts of opportunities to create revenue outside of the traditional rental income."

His prediction is at the high end of the scale. Most managers say they expect revenue increases of 5% to 10%, but those expectations clearly reflect the opportunities for this new and growing arena. Still, the potential is there, and companies are scurrying to form alliances with telecommunications companies, build Web portals and even open flower shops.

While many companies have yet to realize a substantial income flow from these initiatives - or they're still trying to determine their best strategy - all agree that at the very least, services can help keep tenants happy.

"Retaining existing clients is even more important," says Tom Halford, executive vice president with Chicago-based U.S. Equities Asset Management Inc. "The more integrated a company and its employees become to the building - and that's part of what's being done here - the tougher it becomes for them to leave. Tenant retention is probably even more significant than attracting new tenants."

Property managers agree that services are just one more factor that can be used to distinguish buildings. That also is a reflection that keeping an old tenant can be far more cost-effective than searching for a new one.

"The real cost comes when you have to turn that space over, and you have downtime and build-out costs," says another U.S. Equities' vice president, Jack Houze. "At the end of the day, that's what it's all about. The revenue you get - even if it is 5% - is secondary to keeping the tenant."

Keeping the tenants happy and cutting down on space turnover can have a direct effect on the bottom line and - for public companies - a direct effect on their share prices.

"Even if we can't extract one additional dime of revenue from these services, it distinguishes us within the marketplace so that a tenant thinks long and hard before they move out of our building," says Lawrence Krueger, executive vice president and managing director of the Midwest region for Dallas-based Prentiss Properties. "If you take a 1% occupancy increase, that adds 2 to 3 cents per share to our bottom line per year, and that's huge. It's not always a direct relationship of services provided equal monthly dollars coming in from a tenant.

"At the end of the year, sometimes the result is that we're not suffering the downtime from tenant roll over," Krueger adds.

Services, in fact, can be an integral part of a company's branding efforts.

"That's the point," says Carter and Associates' Burson. "We want to brand by rolling out this `Carter-managed' branding. What that means to our clientele is the level of services they get when they're in one of our buildings is very important to us."

From riser to roof Ask property management firms where the big bucks lay, and they all tend to agree that it is in the high-tech areas of telecommunications and related services. Companies are busy signing up providers who are eager to offer a variety of services to office tenants. These include traditional telephone services through building local exchanges, as well as high-speed Internet access, wireless and other services.

"The range of services is quite large," says Eric Yopes, managing director of investments for San Francisco-based Shorenstein Co. "The obvious [services] are telecommunications where you need the building infrastructure to even deliver the services. There's a whole new range of things that infrastructure helps enable.

"One of the largest is in application services provider offerings," says Yopes. "If the world, in fact, moves to a rental model using business software, it will be a good thing that many owners had high-speed connectivity companies come in and add capacity, because that will be an essential way to deliver ASP services."

Running miles of cable and wire through building risers represents a good investment for everyone. Tenants are usually given a choice of several providers, while the building owners and managers take a small slice of the fee that the particular company charges its customers.

"As far as dollars, that depends on building size and the arrangements you're able to make with the providers," says Trammell Crow's Bodin. "We're typically looking at two to three providers per building. People right out of the chute would want to negotiate a minimum amount and then share in the gross revenues from these companies. A minimum might be $1,000 per building, and then you'd share in revenues - maybe 6% to 10% of the gross revenues."

These services can be very good deals for tenants in some cases. For example, Krueger says that after exploring many different alternatives in the area of broadband providers for its office properties, Trammell Crow decided to sign on with Palo Alto, Calif.-based Urban Media. Almost 40% of Trammell Crow's properties already have been wired with the remainder slated to be up and running in the next two quarters.

"The beauty of this service is [Urban Media] was the first to come out and offer a free Internet connection to tenant occupants," explains Krueger. "What we've been able to calculate is that it's worth as much as $3 per square foot per year for a tenant if each of their employees utilizes that connection.

"It also gives them a quick connection because the service is already in the building," he says. "It doesn't take a couple of weeks or a month to get a provider. For a small tenant who is focused on his business, that's almost as valuable as the economics."

He adds, however, that while the service may be free, the company is still in business to make money.

"They have a transaction bar on their screen, and every time a new service is requested through the Urban Media portal, there's a charge," says Krueger. "There's also advertising like other Web sites. That's how they make money."

While some companies are simply taking their own cut off the top for the privilege of reaching their clients, others have chosen to invest directly with the start-ups offering these services.

"With the new non-public, start-up companies, in addition to sharing revenue, there are opportunities to participate in stock warrants that would turn into shares of stock when the company goes public," says Burson. "We're negotiating with a start-up telecommunications company. For what they call `qualified square footage' in buildings, you get a number of warrants that you can convert to stock."

Prentiss is an investor in Urban Media. Shorenstein also has taken an equity interest in both a media and telecommunications company.

Broadband in the malls Demand for high-speed broadband is not limited to high-rise office buildings. Retail space also presents an opportunity to gain revenue through meeting the needs of merchants.

Chicago-based Urban Retail Properties, for example, has moved to bring these services to its shopping center tenants by partnering with other shopping center owners in an initiative called Merchant Wired.

"We've teamed up with five or six other companies to install broadband and wire up a shopping center," says Joseph Shrader, Urban Retail's president for property management. "In talking to national retailers, it's better for them because they can subscribe to this service without the installation costs of their own system. For companies like The Limited and The Gap that have numerous national locations, it makes sense."

Up on the roof Managers also see great potential in the devices that can be placed on building rooftops such as satellite dishes for broadcast or wireless applications. Location can play a decisive role in the success of this type of service. For example, a multi-story building in an open area can provide a perfect location for broadcast because of the clear line of sight it offers.

Shorenstein's John Hancock Center in Chicago is a primary broadcast location for local radio and television stations in the area.

"That's not really services to our tenants," explains Yopes. "People pay high numbers because it's a critical function, and they do occupy a lot of space and have a big facility there."

High Plains Plaza in suburban Chicago is a 200,000 sq. ft., seven-story structure that has attracted considerable interest for rooftop units.

"It's one of the hottest properties in the area because of the lack of high-rises around its location right off the expressway," says Houze of the U.S. Equities-managed building. "Some of the smaller properties may still have 20 or 30 tenants that are a good market for these providers because they're looking for the small- to medium-size companies. You could have a larger building that is owner-occupied that might not be as enticing."

In some older buildings, companies have been able to retrofit structures to accommodate a new kind of tenant. These are the high-tech and telecommunications companies that need to be able to locate their switching equipment over the fiber routes that now crisscross the nation.

The two-building Prudential Center in Chicago, which was recently acquired by Shorenstein, is one such addition to the list of so-called "telecom hotels."

"Pru One is an older building that has big floor plates and extraordinary floor loading requirements in the lower part of the building," says Yopes. "It happens to sit right on top of the old Illinois Central Railroad right of way, which is one of the primary fiber routes into downtown Chicago. It's ideally suited for data center or switch locations for fiber operators.

"Now that we own it, we are converting a substantial part of the lower building to switch center use," he adds.

Flowers and laundry Building owners also are increasingly taking advantage of an economy that has created workdays that stretch from early morning to late at night. Increasingly, companies and their workers are staying at the office far beyond the traditional 9 to 5. That means less time to take care of personal needs, which creates a new opportunity for building managers.

Restaurants, flowers, laundry pick-up and a host of other "concierge" type services have strung up primarily in Class-A office buildings.

"There's an opportunity to produce revenue, and it's being driven in part by tenants and the fact that they're working longer hours, are busier than they ever were and have less free time," says Carter and Associates' Burson. "It's a natural extension of what we perceive as their needs, and what they in fact are telling us."

The use of these services is often dependent upon the location of the building. Shorenstein, for example, discovered that many of its services such as restaurants and coffee shops faced keen competition in a major city like San Francisco. Other services, however, fared far better.

"One of the biggest sellers from our concierge's desk was flowers," says Yopes. "So we made a point of getting a florist into all of our buildings."

Property managers see much greater opportunity for marketing many types of concierge-type services such as flowers, event tickets and even office supplies through Web-based services. These could take the form of a national Web site, although many see portals that are more building-centric having a greater opportunity for success.

Finding revenue in space While high-tech services grab the headlines, some of the greatest profits can be obtained from wise use of a building's space. This includes making use of storage space for tenant use as well as giving them a place to park.

"Many people don't view that as an amenity, but with so many buildings in the congested downtown area, both tenant and visitor parking has become very important," says Yopes.

Bodin says that Trammell Crow generates substantial revenue through leasing parking lots and decks.

"The monies far exceed telecommunications if you've got available parking," he says. "Reserved parking spaces is a typical request."

Bodin also notes that his company would alter building storage areas in order to accommodate tenants. They have been able to collect fees based on generators, HVAC systems and dedicated electric meters.

Industrial services If the gleaming spires of office towers have the glitzy services designed to boost non-rent revenue, then industrial space just might be considered - both literally and figuratively - the other side of the tracks. Tenants in these buildings generally take care of their own space and are really not interested in getting coffee at Starbucks. However, even in these spaces there are still opportunities, not only for increased revenue, but to build good relationships with tenants.

"There's quite a bit of money - depending upon location - for billboard space that you could sell to billboard companies," says Bodin. "The services that we've provided have only been within the common area maintenance expense. Those are the security services within the park.

"Typically you would need the park environment to offer those services," he continues. "When you lease the warehouse, you're usually leasing the building itself. Sometimes you're coordinating the common area maintenance, but you really don't have a lot of control over systems that the tenants use."

While that represents the view of most property managers, Atlanta-based Industrial Developments International's (IDI) Services Group has pioneered efforts to market maintenance and repair services to its tenants. On-site building services engineers in Atlanta, Chicago and Memphis, Tenn., not only handle the buildings' common areas, but they also inspect and offer these services where they are needed.

"We promote them to our tenants to use them to provide any type of maintenance and repair they may need," says Bert Calvert, IDI's senior vice president for property management. "Not janitorial, but we provide for light bulb changes, plumbing problems, small alternations such as new electrical outlets. So when a tenant has a problem, instead of going to the Yellow Pages and trying to figure out who can come solve this problem, he can call IDI Services Group. We can have an engineer come over, evaluate it and give him an estimate, provide the service for him and then bill him back."

Calvert says that the program does more than just provide revenue for IDI. It also is good tenant relations to provide services that are just a phone call away to tenants.

While providing outside services and finding new ways to squeeze revenue from unused space presents great opportunities, it also can present problems. Just selecting the right services that tenants want requires surveys and face-to-face meetings. For third-party managers, it means dealing with owners to determine their desires on what direction they wish to take.

"It's going to be our suggestions to the owners and then their decision of whether they want to move forward with that technology," says Bodin.

For companies that represent multiple owners, the process can be an arduous one.

"The challenge remains that we have these multiple clients with different agendas, different styles, and you just multiply the communications, education and sales efforts by 25 or 30," says Halford. "You have to deliver the same message about these various opportunities out there."

In other words, third-party providers must carefully provide marketing and sales information to owners as much as tenant customers. In addition, tenants and owners must understand the products that are being offered, which, in the case of telecommunications, can be highly technical. Getting these kinds of vendors deployed in a building also can take a great deal of time from management staff.

In the highly competitive world of property management, times have changed. Value-added services have become a means not just to boost bottom lines, but to build loyalty among tenants. It also has created new demands that managers must meet.

Our corporate headquarters [in downtown Atlanta] is a 150,000 sq. ft. office building. It's not large enough to have a deli or a health club, but its got eight or 10 tenants. So we have an arrangement with a dry cleaner to pick up [laundry] on Tuesday and drop it off on Thursday. We've got a similar set up with a food vendor who brings in different types of food and sets it up in an area where the tenants can go down and don't have to leave the building."

"It helps lock that tenant into IDI Services Group and develop loyalty, because the tenant is getting good service from us in additional to the normal property management services," he explains. "It's not big bucks, but we've been able to make money from it and pay for the engineer's salary."

What does it take to be a success in the property management arena? What is required to win third-party contracts and keep them? The talk today is about increased competition and the need to provide new services and amenities that can boost the bottom line. However, the real secret to success is quite simple, say leaders in the field. It all comes down to providing good, trouble-free service.

"It's all about being responsive to owner demands and needs," says Lawrence Krueger, executive vice president and managing director of the Midwest region for Prentiss Properties Inc. "It's all about having knowledge of the subtle differences that exist in each market where we operate these properties."

In addition, Krueger says that his company has to "act and operate as an owner in those markets so that we provide the same type of service levels for them as we do for ourselves. Those various requirements are not met by a lot of companies on a third-party basis. Institutional owners over time know the difference."

He noted that typically the way his company loses a contract is when a property is ultimately sold.

"We work our business by leasing the properties out until they become profitable enough to be sold," he explains. "The reason that you're back in the bidding for that owner is because you performed well. Now they're going to give you another opportunity to do the same with another property.

"You should have some leg up on the competition, and, if you don't, then you didn't do very well on the prior assignment and you're not going to get this one," Krueger continues. "You almost always know if you're going to get the next assignment based on your past performance, but you still have to prove yourself again and again." Good service includes keeping occupancy high and providing services that minimize the time that an outside asset manager has to spend on the properties. That manager is going to appreciate the ability to devote his time to other more troublesome properties.

"If he can spend one hour per week with Prentiss Properties and that's all it takes to keep the property running smoothly, then he's going to give you more product over time," remarks Krueger. "If he's spending a lot of time with an outside firm in order to straighten out a property, that's how we create opportunities for the next piece of business. Those asset managers will change and give you an opportunity to take over a property."

Even in a high-tech world, some things never change. High-level service is as important today as it was in the past, and is certain to remain so in the years to come.

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