By Richard Prokup
Senior Vice President of Operations-First Industrial Realty Trust
According to economists, the most recent recession ended in mid-2009 and we are now a full two years into the recovery. A quick look at industrial vacancy rates in Chicago makes it clear, however, that the recovery has been and will continue to be a slow, upward climb. With the overall industrial vacancy rate in the double digits, and some submarkets lingering in the mid-teens, the market is competitive, to say the least.
This type of market exacerbates the need for ownership to increase its focus on attracting and retaining tenants. An 
owner’s approach to property operations and leasing is a critical component in this effort. While one cannot change the location or certain physical aspects of a property, effective owners aspire to make a given asset the highest quality and best maintained stop on a leasing prospect’s market tour. The prospect’s impression should be that ownership is involved and focused on its portfolio and its customers. This can be accomplished through many means, but communication, capital management and attentive property management are paramount.
Communication is the tried and true method of customer satisfaction. Often in real estate, however, property managers do not view tenants and prospects as customers, and do not provide them with the response times and prioritization they deserve. This is primarily due to the fact that industrial property managers and leasing representatives spend so much time on the road traveling from property to property. This makes it more likely that they will defer returning phone calls for hours or even days. To overcome this, ownership must commit to making tenant and prospect calls a priority, even if they do not have a ready solution to a tenant’s problem. This also means providing an alternative contact in their voice mail, when the main tenant contact is unavailable. Ownership can reinforce this commitment with employees and tenants by testing it through customer satisfaction surveys. An example: Over years of tenant surveys, First Industrial Realty Trust has found a direct correlation between the percentage of calls returned promptly and the overall satisfaction rating reported by tenants. Those surveys and results show that satisfied tenants are also more likely to renew and provide referrals. To accomplish the objective of being responsive to tenants, First Industrial employs a “2-Hour Rule” in which every tenant call is required to be returned within two business hours. This policy has become the cornerstone of First Industrial’s industry-leading service program.
Another avenue of ownership communication is during the leasing process. It is common in industrial real estate for ownership to be a passive entity during this time period. To the tenant or prospect, ownership is the third party broker and attorney. Direct contact with ownership takes place only over the phone during lease document negotiations, if at all. Ensuring that an employee of the owner attends as many showings as possible can be an effective demonstration of commitment and interest. From the standpoint of property knowledge, no one can better demonstrate how a building can fit a prospect’s needs than someone with skin in the game and knowledge of the property. Third party agents are important partners in the leasing process, but cannot be expected to have a full understanding of ownership’s objectives and priorities. In addition, personal attention from ownership creates personal relationships, allowing the opportunity to sell the property, as well as the ownership group itself. This can become a differentiation point during a prospect’s tour and sets the stage for the “principal to principal” negotiations that close deals.
Strategic capital management is another effective way to place your vacant space on the prospect’s short list. This comes in two forms: work to make a vacant space move-in ready and base building (exterior) capital.
For make ready work, speed to market is the key. Ownership should be strategizing at least 60 days before an existing tenant moves out of a space. Discussion should revolve around “what does this space want to be” or “how can we maximize marketability”? Owners often make the decision not to make dramatic changes to a space at the outset, hoping to find the needle in the haystack who needs the space as-is. Then, after months or years of downtime, ownership makes the hard decision to spend the money they should have spent to begin with. It is better to make the tough decisions today. For example, unless it is in pristine condition, new carpet and paint should be standard for each vacancy. The office space should be reconfigured for optimal efficiency, warehouse lighting should be upgraded to T5s or T8s and dock doors and levelers should be repaired or replaced. If the space has 20% office in a 5% office market, it is better to tear it out the build-out then to be chronically eliminated from tour lists. Once upgraded, the spaces must be maintained in a clean condition, especially bathrooms which make an important impression. Anticipating tenants’ needs will result in shorter downtime, which quickly offsets the capital invested. Finally, make the space memorable. First Industrial places small refrigerators in its larger availabilities filled with drinks, which makes a memorable impact and clearly sends a message that ownership is tenant-focused.
Similarly, base building improvements and maintenance such as parking lots, roofs and building envelope are another opportunity to either attract or repel potential tenants. In a competitive market, many owners tend to conserve cash and control costs. That is understandable, but can be short-sighted if the replacement/repair is truly needed. Even an investment of several dollars per square foot will be quickly recovered by expedited lease-up, considering gross rents in the Chicago market average over $5.00 per square foot. In addition, keep in mind that capital investment not done today is not eliminated, only deferred. Therefore, it is better to do it now and get the immediate benefit, then to delay and regret. Investing capital helps win prospects and, over the long-term, translates into a higher quality portfolio, increased occupancy and higher property values.
Despite the beginnings of stabilization, we are still in the most competitive market we have seen since the late 1980s and every edge is important to successful leasing. Ownership must move away from a commodity mentality and make their properties stand out from the competition if they want to outperform in this difficult market. Taking care of your customers and buildings goes a long way towards that goal.
Richard Prokup is Senior Vice President of Operations for First Industrial Realty Trust’s Central region, where he oversees asset management, operations and lease negotiations. Mr. Prokup has more than 20 years of commercial real estate experience. He earned his masters of business administration and bachelor of fine arts at the University of Memphis
