Illinois Real Estate Journal recently caught up with two commercial real estate professionals to learn about property management in today’s market. Lee Kotler, senior vice president at Crossroads Partners, and Bob Quast, vice president at Lincoln Property Company and Vice President of BOMA/Chicago, both shared their perspectives on the developing nature of today’s property management.
Illinois Real Estate Journal: How have property management costs changed in recent years?
Lee Kotler: More and more owners are negotiating management fees to improve their own bottom line. Given what had happened to the market over the last 7 years, many properties are not stabilized and don’t necessary have enough income to cover all the operating expenses and debt service. In these cases, many property management firms are charging a flat fee, or minimum “floor,” to manage a property rather than a percentage of the collected income. We are seeing our fair share of flat fee assignments especially when we are hired by banks and receivers. Some of the factors that influence the cost can be the location of the properties in relation to one to other, or who the ownership group may be. There are tremendous economies of scale for the management company if the properties are nearby and you can assign manager to the region or to a portfolio for a specific client. If a client gives us multiple properties rather than a one off deal far from anything we have, the fee would be structured differently. If the management company is in a position to add some value and services for their clients, like in house leasing, and construction or project management, it allows the firms to enjoy multiple revenue streams aside from the management fee, which get re-invested into the firm in order to hire and afford a higher caliber of manager. But like any business, property management firms strive to make a profit and create a sustainable workplace that will both attract and retain top talent. In order to do that, its needs to be profitable.
Bob Quast: There are two major components to office building expenses. The largest component is real estate taxes, and the other is everything else— utilities, cleaning, security, maintenance and repairs, administration and so on. Property taxes are extremely unpredictable but definitely increasing due to ongoing fiscal crises facing local municipalities and school districts. While most properties retain counsel to assist them in making sure the assessors have appropriate evaluations, it’s difficult to control those expenses. After real estate taxes, the largest operating expense is utilities, followed by janitorial, which is 100 percent labor. Security professionals, management staff, and engineering professionals are also labor driven expenses subject to market wage increases. Energy is also a very large component of operating expenses. While energy costs continue to increase, the trend is to reduce consumption for two reasons— to achieve sustainability objectives, and to control costs.
IREJ: What are the primary factors that influence cost? How can property managers keep costs manageable?
Quast: One way to manage costs is to continuously evaluate and bid out provided by contractors and vendors. Another important factor in controlling costs and extending the life of the building and mechanicals is to schedule regular and predictive maintenance.
IREJ: How are local property managers incorporating sustainable “green” practices in their buildings?
Kotler: We don’t see as much of it any more given higher-than-expected costs to the building and its owner’s resistance in investing into these practices. Notwithstanding, as a management firm, we have incorporate recycling programs, encouraged retrofitting lighting as part of tenant build-outs. We have also helped implement energy efficient initiatives in regard to the HVAC systems, landlord seem open to that. While a Manager can suggest, it’s up to the owners to authorize. As a manager, you spend a lot of time in a cost analysis and payback period and can provide recommendations to your owners under that scenario.
Quast: Most professional property managers are pursuing designations for their properties, including LEED Certification, Energy Star, and the BOMA 360 program. These are all programs that, buildings look to implement, which provide operating performance measures that are sustainable. Examples include implementing green cleaning practices that use environmentally friendly ingredients and procedures, and in some cases, daytime cleaning, which can reduce utility costs by eliminating the need for lights on at night.
IREJ: How do property management strategies differ by industry sector?
Kotler: An industrial or office tenant is much different from a residential tenant in a multi-family apartment complex. The residential tenant requires a little more attention and hand holding, while the more corporate clients’ requests and decision making are a little less emotional and more business driven. They all have their hot points and require a unique set of attention, but looking out for your owners’ best interest and maximizing the value of the property is always the top priority. A solid tenant relations program is paramount to that goal.
Quast: I would say there’s very little difference. If you look at an office building, it’s an asset that someone invests in to get a return—it’s just like any operating business. All the costs associated with operating that business, for the most part, are operating expenses that are allocated back to the tenants as a part of their rent. So property managers of all industries are incented to operating as efficiently as possible so they can keep their rent structures competitive..
IREJ: How are property managers engaging/retaining current tenants?
Kotler: First and foremost, being responsive and saying yes to any reasonable request. Secondly, tenant events and outings create a lot of goodwill. We will bring an ice cream truck out for a mandatory building fire drill, just little stiff like that goes a long way. We say that all a tenant needs to do is pay their rent on time and we will do the rest. All of this goodwill leads to a higher likelihood of renewal, which usually accrues to the owners benefit with less downtime and less deal costs if you have to turn and re-market spaces.
Quast: Property managers are very focused on providing services to their tenants. Most managers conduct annual satisfactory surveys to identify areas of improvement. These days, a lot of higher-end properties have amenities, which include concierge services, conference rooms, fully equipped gyms, patios, and roof decks. Several buildings even have a whole host of programs to communicate effectively with tenants, such as automated work order systems.
IREJ: What are some other local trends you’ve noticed recently in the property management space?
Kotler: Much more technology driven, tenants want to pay their rent and request service calls via email or applications and sometimes even apply for space on line, especially in the residential arena. Our tenant service portal is fully automatic. Also, we try to create a true partnership with our owners, which means we do the traditional management like paying the bills, collecting the rents, and working with contractors for whatever works need to be done. More and more, we provide more of a macro level overview of the property and make sure operations are consistent with the owner’s needs. We provide more and more asset management which gets into more strategic planning on short terms and long term goals, underwriting leasing transactions, potential payback and analysis of large capital improvement projects and potential sale and refinance opportunities for the owners.
Quast: Use of technology has been the biggest trend. There are more and more platforms being developed that enhance our ability to communicate with clients, tenants and owners, but I think it’s going to begin to have a big impact in the way we integrate our supply chain, and work with our vendors. Technology provides greater transparency and accountability, which enables us to more effectively measure performance and improve business processes.
IREJ: Any predictions for the next 5/10/15 years?
Quast: I would say that we are at the peak of absorbing technology in the way we operate buildings, which will have the greatest impact in the next 10 years. It will also affect the way tenants use space in an office building, enabling them to lease less square feet than in previous years.