COVER STORY, JUNE 2009

Q&A On Topic: Property Management
The proper property management can provide cost savings and operating efficiency in a market in which such factors have never been more important.
Kevin Jeselnik

Heartland Real Estate Business recently spoke with Dean Mueller, executive vice president and director of real estate management services for Colliers Turley Martin Tucker about the property management industry’s role in the changing landscape of commercial real estate. In the discussion, topics ranged from property management’s ability to impact lease and sales transactions, as well as the opportunities arising from court-appointed receivership, which demand that a property be whipped into shape quickly before a sale can take place.

HREB: What can you do to help owners deal with, or fill up, vacancies that potentially arise due to the weakened business environment? How can property management help land new tenants?

Dean Mueller: Property management should be an extension of the leasing team. In terms of the physical space, Colliers Turley Martin Tucker (CTMT) is focused on preparing clean, “show-ready” vacant spaces. With capital expenditures more limited than ever, the property manager needs to be clever and efficient in preparing vacancies. CTMT is utilizing in-house labor to clean up spaces, while leveraging size and buying power for economic demolition, painting and carpet removal. Some subsidized energy credits may be available through local utility providers or energy finance firms to provide for lighting retrofits. Simple steps are also still important, such as ensuring that existing lights work and all lamps are operating.

The property manager should also have a very good understanding of the total operating costs for a project, including the costs of potential tenant improvement work. It is essential that information provided to a tenant is accurate and is turned around in a very timely manner.

As the saying goes, “you only have one chance to make a first impression.” This is very true when it comes to securing new tenants. Everything that you do during your first interaction can help determine whether a prospect signs with your project or goes elsewhere. Treating tenant brokers in a professional manner also goes a very long way in this business environment.

Property management should coordinate with leasing and marketing efforts to ensure that vacant spaces contain organized and current advertising and space plan information for showings. The property manager carries the responsibility to maintain current as-built plans (hard copy and CAD), as well as current building technical specifications. CTMT will often engage architects for simple remeasurement “spot checks” to ensure that vacant square footages are calculated correctly as well.

The property manager should have relationships with neighboring existing tenants to identify opportunities for expansion, temporary storage or other use that may generate temporary or permanent income.

As a further marketing vehicle, property managers should also use their relationships with the city/village to ensure awareness of vacancies and leasing opportunities within their area. Finally, our management and leasing teams meet on a regular basis to make sure everyone is focused on the client’s objectives for a project including leasing goals.

HREB: How can property managers help hold the value of a property in a climate where values are declining in many markets and property types?

DM: In preservation of rental income streams, CTMT property managers are required to have intimate knowledge of their tenant companies. Beyond just closely monitoring aged receivables, the property manager uses their personal relationships with tenant contacts to understand tenants’ financial health, occupancy, facility usage (internal demand for space), location of other local offices, strengths, weaknesses, opportunities and threats.

Property managers should also focus on things that they can control. They can’t control the capital markets or the credit markets, but management can help control net operating income. Good property managers should help enhance revenue by taking great care of the existing tenants, and making the project attractive for existing tenants to stay and renew their leases. With reduced downtime, lower tenant improvements, lower commissions and usually higher rents, renewals are often the most profitable type of lease. Effective property management is also an important part of attracting new tenants, which also is critical to growing revenue.

Property managers must also do everything they can to keep costs as low as possible without sacrificing the tenants’ satisfaction. Competitively bidding all major service areas should be a regular practice. Property managers should also have a good understanding of property taxes and energy. An effective property management firm should have an energy management program that helps building owners identify opportunities for savings. Not only is energy management good for the bottom line, but it is also excellent for public relations with sustainability initiatives.

As overall market values decline, there are great opportunities to reduce taxes by reviewing and appealing assessments. Real estate taxes vary by district and also by state. Effective property managers should be advising their owners on the best possible avenues for tax appeal. It is our job to ensure that they are introduced to the best resources to increase the likelihood of success.

Property managers will also create value by preserving and protecting the physical assets with preventative maintenance programs. Proactive maintenance and repair programs in all aspects will avoid future capital and expense. Especially in leased product with recoverable expense pools, the manager should be advising owners on maintenance opportunities now that will provide for sound structures, systems and grounds should future vacancy arise.

HREB: How can quality property management best enable clients to market and sell a commercial real estate property?

DM: In the sales process, information exchange and communication are critical. Quality property management will help to provide credibility to a prospective buyer. The management firm should bring comprehensive financial, contract, specification, tenant history, and operational information and history to the sales offering and due diligence process. Also, providing evidence of good tenant relationships and tenant satisfaction through tenant survey results is beneficial.

A manager should also be keeping detailed information regarding preventative maintenance on all major pieces of equipment. A history of completed maintenance, repairs and improvements at the property will prove the seller’s reinvestment in and past maintenance of the property. The buyer’s due diligence period is a key point in price negotiation and a well-maintained property with historical documentation will tend to fare better in this process, preserving the seller’s exit value. Most buyers will still perform their own financial and physical due diligence, but the ready availability of detailed information can shorten the due diligence cycle as well.

HREB: What do the next 12 months hold for your business? Will the lack of development help or hurt your property management division?

DM: CTMT is very optimistic about the growth potential for property management services for the next 12 months. We are well-positioned for growth. Several trends in the commercial real estate industry provide us with optimism on the property management side:

• We have recently seen more and more developers and owners of properties consider outsourcing property management. The slowing development pipeline and heavy overhead costs for in-house operations have contributed to these changes.

• We also anticipate that private capital will be the preferred buyer of projects for the foreseeable future. Private capital has traditionally outsourced their property management and has fueled CTMT’s growth.

• Our challenged financial markets have drawn special servicers and financial institutions into very active roles in the operation of real estate projects. These groups will need outside help for receivership work, property management, leasing, valuation and disposition assistance.

• The medical office sector also continues to grow and expand. CTMT has focused on this sector with specialized experience and service offerings.

The lack of development will neither help nor hurt our property management division. We will continue to create value for our owners in fine-tuned cash management, watching our tenants, leveraging the best performance for least dollars in capital outlays and operating properties efficiently.

HREB: During a down market cycle, how can property management deliver cost-saving benefits to property owners?

DM: CTMT uses a customized, strategic approach to deliver property management services that consist of identifying synergies, cost avoidance opportunities and process efficiencies. Specifically, CTMT can deliver quantifiable savings in three distinct areas to our clients:

• Purchasing of Goods and Services: Using industry relationships to leverage the buying power of more than 330 million square feet of managed properties to reduce costs for clients while maintaining superior quality and service.

• Contract and Vendor Management: Our extensive experience with contract management and network of service providers across the nation enables us to benchmark, identify cost savings and deliver a higher quality of service(s) for each of our clients.

• Process Improvement and Operational Efficiencies: This is a balancing act to ensure best practices are applied while ensuring that tenants receive service that exceeds their expectations. Cost savings, regardless of the market cycle, can only be justified if the service delivery is acceptable to the building tenants. CTMT uses proprietary web-based technology to track the overall tenant experience. Property management personnel are held accountable for their efforts to streamline processes while valuing tenant relationships.

HREB: In what ways can experienced property management providers create greater efficiency in commercial property operations?

DM: By consolidating spending with a smaller group of vendors, economies of scale can be achieved fairly easily. It is also important to review service levels in each property and right-size them based on the specific requirement for each tenant. We rely on our vast network of qualified vendors to perform specialized tasks, as we competitively bid and manage contracts to assure clients are realizing best-in-class service at the lowest possible expense.

It is also more important then ever to practice good maintenance techniques; it is proven that deferred maintenance actually ends up costing significantly more over the long run. CTMT utilizes our Web-based preventative maintenance software to generate and dispatch work orders, which minimizes equipment downtime while reducing risks, costs and occupant inconvenience.

HREB: What services can property managers offer to help owners better interact with and serve tenants?

DM: With everyone being tasked to do more with less and streamline the process, technology can play an important role in this process. CTMT has invested heavily in developing Web-based software to simplify workflow management and manage the needs of client and tenants. Such a system can provide access and communication for the client, tenants and our field professionals from anywhere via the Web.

In a down market, losing a tenant to a competitive property is costly. It is critical that the property manager is working in partnership with the leasing team in advance of lease renewal discussions. Oftentimes, tenant issues can be addressed with minimal capital investment and a property management team that reacts to issues with an ownership mentality.

HREB: According to Whitestone Research, a Santa Barbara, Calif.-based policy research firm, property maintenance and repair costs have declined by 4.7 percent during the last year, the first decrease in costs since 1994: How can you leverage this trend to better serve clients?

DM: Over the past 10 years, CTMT has been able to reduce maintenance, repair and operational costs at each of the assets we manage by leveraging our size, customizing service levels for each client and constantly reviewing building operations.

CTMT continues to uncover significant savings — often in areas not typically scrutinized with unique techniques. Historically, we consistently find savings between 10 and 15 percent of operating expenses across portfolios within the first 18 months after we are awarded an assignment. In partnering with our clients, we first must understand their operating objectives. Then we are able to identify savings opportunities and process improvements that deliver savings to the bottom line.

HREB: Is there a different challenge to managing a property that is in receivership? What are the most important tasks when managing such a property?

DM: Acting as a court appointed receiver requires a high degree of communication and a thorough understanding of the rights and obligations of all parties. During the foreclosure, the receiver has a duty to respect the rights of the borrower, lender and lien holders. This responsibility is in place from the appointment of the receiver through the end of redemption.

The fundamentals of management remain the same in terms of maintaining tenancy, accounting for financial activities and preserving the value of the asset. The entire team involved with the property, from management to leasing and engineering, is focused on what is best for the property.

The differences of a receivership arise from the need to keep all parties informed about the status of the property, and to seek consent of the parties or the court prior to taking certain actions. These typically include leasing and the expenditures for leasing or property work. Lease modifications or altering any aspect of the property that might affect value or the redemption price need to be addressed proactively. By obtaining consent and establishing strong and open communication, the receiver keeps the property moving forward during foreclosure.

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