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Managers Face Financial Challenges

Low rental rates are forcing property management firms to take steps to protect their buildings' income.

As property management firms try to retain tenants, declining commercial real estate values and disappointing rental rates are compelling them to find creative approaches to maximize their clients' net operating income. For property managers, this means a fundamental change.

“Property managers have to think like asset managers,” says Barry Katz, a senior managing director with CB Richard Ellis (CBRE). “Property managers used to think, ‘How can a property be serviced, how can lower expenses be achieved, and how can tenants be more comfortable?’”

Some of the steps the managers are taking include trimming staff levels, and negotiating discounts with vendors for services such as elevator repair, maintenance of the property grounds, and utility installation. As buildings lost tenants during the economic downturn, operational staff was cut at properties across the country, including janitorial, secretarial and maintenance workers.

Because many property management firms are servicing tenants with a smaller staff than when their agreement was originated, Katz says the firms should be able to obtain discounts from providers, whether janitorial or other servicers. “Many times that's left on the table or not aggressively sought after,” says Katz.

On the operating expense side, the main savings comes from analyzing service levels and bulk purchasing, says Katz. Firms that manage vast amounts of square footage nationally can offer packaged pricing and servicing levels from their vendors across the board from property taxes to insurance to utilities to repairs and maintenance, which helps protect an owner's net operating income.

As staffs have been cut due to budgetary limitations, property management firms have been re-training their employees. “Training is as important now as it has ever been,” says Dan Pufunt, head of property management with Chicago-based Jones Lang LaSalle (JLL). JLL trains its staff in the financial skills and risk management aspects of property management.

“Clients want property managers to be diligent relative to capital planning,” states Pufunt. That can include the delicate balance of renewing tenants while minimizing a building's improvement dollars.

Meanwhile, CBRE trains its employees to seek concessions that might not be permitted under the lease agreement that can be made to improve the long-term relationship with a tenant. That show of goodwill can convince a tenant to renew its lease at its current property.

Holistic marketing

While they still adhere to servicing basics, Katz adds that it's also important for property managers to understand how a building reacts to the local and national commercial real estate market. The aim is to make sure that a building is branded and marketed to compete for choice tenants.

The managers need to understand tenants' concerns. “Tenant brokers are asking, ‘What's the strategy of the owner, what's the long-term view?’” says Katz. Is the building going to be leased up and flipped? Will the building be maintained? Will the owner make sure that the tenants are comfortable, both physically and financially, in the building during the next three to five years?

Property managers have to be holistic in their approach, says Katz, by protecting their clients' financial interests.

And while property management firms are focusing on the basics to attract and retain tenants, the firms are also educating their employees, including technology and marketing managers, to be aware of future trends in the industry. What will the next generation of occupants be looking for? How will they use space?

“Ten years ago, we would've never realized that energy and sustainability services would be a hot topic today,” says Pufunt. Taking a page from that book, JLL demands its property managers be forward thinking on behalf of its clients.

“It would be shortsighted to expect tenants to use space exactly the same way as they did 10 years ago,” adds Pufunt. And with different communication avenues like Facebook, Twitter and other forms of social media, a new type of workforce is coming into the market that has developed a new way of communicating with each other in their daily lives. Pufunt believes these new communication avenues will translate into the workplace, and that property managers have to be ready.

(First-half 2010)

Client Description Service provider
RREEF 70 million sq. ft. office and industrial portfolio nationwide CB Richard Ellis
Panattoni Two Class-A industrial properties in Memphis, Tenn.: 360,000 sq. ft. Eastpark III and 372,800 sq. ft. Eastpark IV CB Richard Ellis
AEW Capital Management Colonial Center in Atlanta: Four six-story office buildings totaling 653,000 sq. ft. Jones Lang LaSalle
An institutional investor Gunn Allen building in Tampa, Fla.: 117,000 sq. ft. Class-A office property Carter
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