Not too many years ago, commercial property managers engaged in a comfortable existence of mainly custodial, janitorial and rent-collecting duties. They surfed the quiet backwaters of commercial real estate and avoided the spotlight of increased performance expectations.
However, that ideal state of affairs abruptly ended with the escalation of demands on owners to improve financial performance and create additional value. Impetus was added when many owners elected to hold onto their properties in the wake of slowing sales in late 1999 and 2000, making it even more important to create added value in order to generate market appeal.
Looking ahead, a slowdown in rent growth in 2001 may make it more difficult for owners and investors to achieve their desired results through market appreciation, according to Rick Kirk, president of Houston-based PM Realty Group. As a result, third-party managers have been propelled front and center. Now, they are responsible for a whole host of new tasks that require upgraded skill sets, ranging from administrative, to technical, to marketing and financial expertise.
Revenues beyond rents
Creating revenue beyond rent is one of the primary avenues to added value. Typically, non-rent revenues account for 4% to 5% of all gross revenues, but occasionally they can comprise a significant portion of building income. For example, renting rooftops for antennas, satellite dishes, voice, data and broadcast transmission can yield ample dividends.
A good case in point is Chicago's John Hancock Center at 875 N. Michigan Ave., acquired in 1998 by the Shorenstein Co., San Francisco. John Grassi, chief investment officer at Shorenstein, explained that the company determined that the property's rooftop was under utilized relative to non-rent income. Nearly all the leases for antennas and other communications equipment were due to expire in the near term, and the technology on the roof was dated. So Shorenstein added new technology that offered rooftop access to more users. The company signed 10-year leases — in some cases longer — with TV and radio networks that were willing to make long-term commitments.
According to Grassi, rooftop revenues are quite substantial, equal to several floors of occupancy and 10% to 15% of total gross revenues. As a result, the building now has one of the most valuable rooftops in the United States, he said. Also, the building draws 5% to 8% of gross revenues from operation of its 94th floor observatory, which offers a panoramic view of the city.
Creative income opportunities are expected to become a larger focus in 2001 as owners mine a number of related extra revenue sources.
Two extra revenue sources for owners include leases for rooftop antennas and satellite dishes, as well as fees from telecom service providers who seek tenants' broadband business.
For example, Duke-Weeks Realty Corp., Indianapolis, has joined forces with venture capital giant Kleiner Perkins Caufield and Byers as one of the founding shareholders in Broadband Office Inc., a national telecommunications firm dedicated to providing state-of-the-art broadband services to office properties nationwide. In addition, Duke-Weeks is a member of an industry alliance called Office Technology Consortium, designed to develop Web systems for linking prospective tenants with landlords.
“Third-party managers aren't able to act on solving problems because they don't have the resources until they go back to the owner, and by that time the opportunity is lost.”
— John Gates CenterPoint Properties Trust
Additional revenues derived from telecommunications deals are becoming more common, as well. According to Richard Reeves, president of Delray Beach, Fla.-based Sunbelt Management Co., “Most owners have telecom service providers with whom we share revenues or charge for access to our tenants.” Transmitting and receiving TV and radio signals from Sunbelt's tallest buildings can represent as much as 10% of gross revenues, although it's more frequently about 1%.”
Jim Greenfield, vice president of real estate service at the Archon Group, Dallas, said his firm focuses on office and telecom providers who pay Archon for access to tenants. “Some of them have their own offices on site depending on the depth of services provided,” said Greenfield.
Maureen Ehrenberg, president of Northbrook, Ill.-based Grubb & Ellis Management Services, said telecom companies help building owners provide more connectivity with tenants on a revenue-sharing basis. The telecom/office boom often goes beyond fiber optics to encompass outsourced providers who furnish information technology (IT) to tenants.
For example, there may be an IT representative on the manager's staff who personally assists tenants with their computer and phone problems and Web page changes, trains them on software applications, and in general provides electronic trouble-shooting services. In that manner, tenants can reduce their technology expenses while obtaining more consistent and reliable service.
Richard Greninger, managing director of property operations for Washington, D.C.-based CarrAmerica, said his firm offers tenants multiple communications channels. “Web-based tenants can contact us on a 24-7 basis via the Internet, and we respond immediately regarding their service needs,” he said.
In a similar vein, Dean Mueller, executive vice president of St. Louis-based Colliers Turley Martin Tucker, said owners want more real-time reporting and the ability to be online to monitor their assets.
There are a number of other sources of non-rent revenues including parking, vending machines, fitness centers, business conference rooms, food service facilities, ATM machines and advertising. Under the latter category, one of the newer approaches is to install small computer monitors in elevators that flash news, stock market information and advertisements to riders. Building lobbies, exterior walls and the walls of parking garages also double as advertising mediums.
CarrAmerica has an interesting extra source of revenue in HQ Global Workplaces, in which CarrAmerica holds a minority interest. Through HQ Global Workplaces, tenants can access full-service offices on a temporary basis for a variety of reasons: to alleviate the need for overflow space or establish a cost-effective foothold in a new market; to provide a base for representatives who travel, not unlike airline red carpet clubs; or to provide working space for a tenant's employees.
Tenants can dodge long commutes during rush hours by beginning the workday in an outlying HQ Global Workplaces location not far from their homes, Greninger said.
Value creation is the key
Many agree that value creation is the key role of property managers today. They need to be asset managers and strategic planners first but still have the responsibilities of managing the physical components of the building.
Jimmy Gunn, vice president of property management at PM Realty Group, Houston, offered this assessment: “The days of the caretaker manager are over. Owners want their property managers to have asset manager capabilities and strategies to enhance the value of the property.
“Owners are not paying the kind of fees we require just for turning on the lights and cutting the grass,” Gunn continued. “It takes a different kind of person today who is better educated and more sophisticated.”
Jana Turner, president of management services of Los Angeles-based CB Richard Ellis, described the property manager's changing role as a transition from real estate specialist to business generalist. “They need to be mini-CEOs and know a little bit about a lot of things,” she said. “It's gone from a custodial to an asset management environment.”
David Hubbs, principal at Newport Beach, Calif.-based PM Realty Advisors, places a high priority on owner reporting, including accounting systems and database applications. Managers need to understand the software applications of each owner they work for, and this is a huge burden, Hubbs said. He believes managers also need stronger skills in financial analysis and budgeting, plus a better understanding of owners' decision-making and how to create value.
John Combs, president of U.S. Property Services at New York-based Insignia/ESG, said owners expect improved execution of strategic as well as non-strategic functions, including financial modeling, capital expenditure analysis and hold-sell analysis. Property managers also need to embrace and use technology in the daily workplace, he said. With the advent of portals, owners and managers are online with tenants in real time.
John Santora, executive vice president of New York-based Cushman & Wakefield Inc., sided with Combs. “We're beginning to move into the role of asset managers, taking on the responsibility for the whole life cycle of the property,” he said.
William Krouch, CEO of the leasing and management group at Chicago-based Jones Lang LaSalle Americas, emphasized that many owners who have numerous, widespread properties today turn to their property managers for more of a portfolio management role. “We need you to do more because we have fewer people to do it” is what JLL frequently hears from owners, Krouch said.
John Nemecek, senior vice president of asset and property management at Duke-Weeks, observed that there is far greater emphasis on the numbers side of the business today than 15 or 20 years ago. Property managers must be able to create an effective budget and manage it. “They're serving a dual role as property managers and asset managers,” he said.
Sam Gould, president of Chicago-based Alter Asset Management, said the property manager's role is serving two customer bases — building tenants and owners. Third parties are assisting owners in value enhancement by performing more of the work that used to be done by asset managers. Ehrenberg said managers are being looked upon as agents of change as new technology enters the workplace.
John Gates, president and CEO of Chicago-based CenterPoint Properties Trust, offered a sharply different view of third-party property management. “As owners, we look on our business as problem-solving, not coupon clipping,” he said. “Third-party managers aren't able to act on solving problems because they don't have the resources until they go back to the owner, and by that time the opportunity is lost. They're rent collectors and don't have the resources or authority to go beyond that.”
There's general agreement that it's easier to be a property owner than a third-party manager. Gould pointed out that processes are simplified for the firm that does its own property management, and it's more profitable to be an owner/manager because there is not as much downward pressure on fees and upward pressure on providing information and services.
“The big are getting bigger, and there's very little entry into the business.”
— John Combs
“Owners sleep better,” quipped PM Realty Group's Gunn. “They don't have 30-day contracts to contend with and are not about to fire themselves.”
Not unexpectedly, technology has made a far-reaching impact on property management. “There have been so many technology advances that the challenge is to capture as much information as you can to shorten the sale time of the property considerably,” Ehrenberg said. “If you do that, you can make more money in a down market.”
Technology creates efficiencies and reduces expenses on the operations, information and tenant sides of the business, according to Santora. Echoing those sentiments, Mueller added that tenants who formerly called for service requests now can e-mail those requests for greater efficiency.
Consolidation among service providers is another major trend in property management. “The big are getting bigger, and there's very little entry into the business,” Combs said. Krouch agreed that owners want a core group of service providers and are consolidating their work among a smaller group of providers.
Owners who operate in multiple markets want property managers who can assist them on that basis. “National and international property owners want to partner with their counterparts on the property management side,” Greninger said.
Most new amenities — portals and high-speed Internet, for example — are in the area of technology and broadband services. Reeves cited expansion of some traditional services, such as extra cleaning and additional HVAC.
Only time will tell
To no one's surprise, opinions are mixed about the outlook for property management in 2001. Combs of Insignia/ESG anticipated “a robust and record year” but conceded that fewer properties will sell in 2001 because of a slowdown in capital markets and the economy. Additionally, more property owners will consolidate their outsourced management, Combs said.
Alter Asset Management's Gould said demand will increase if there's a recession because owners will need to perform better to obtain the same financial results.
Colliers Turley Martin Tucker's Mueller concurred that the business will grow in a slowing economy because owners will turn to third-party service providers to create added value for existing buildings.
JLL's Krouch also predicted further consolidation of service providers but said the trend will benefit the surviving players because they have a critical mass in the marketplace. Owners want managers to help them execute their growth strategies and those properly positioned will benefit, he said.
Hubbs at PM Realty Advisors raised the possibility of a recession and said commercial real estate players are becoming more cautious. “Investors are shifting their investment strategies from opportunity to core investments,” Hubbs said, “because they feel the real estate cycle is peaking.”
John Bell is a Chicago-based writer.
What owners want
Given their expanded role, what are owners seeking in their property managers?
Hubbs said he looks for high skill levels in financial analysis and budgeting. Property managers need to understand new accounting systems, increased reporting requirements, database applications as well as legal and environmental issues, telecommunications issues, OSHA regulations and indoor air quality, he said.
Reeves said Sunbelt Management Co. wants managers who can perform sophisticated financial reporting and analysis. He expects managers to be up to speed technologically and possess strong people/communications skills.
Greenfield's firm, which performs asset management services for owners, also hires third-party property managers. He said Archon looks for managers who pay attention to detail, who operate the building in a manner responsible to tenants and who emphasize tenant retention.
Property managers also can come into play when owners look to sell a property. “They want us to help in property disposition, and we may or may not wind up managing that property, depending on who buys it,” Krouch said. “Owners also want us to be their eyes and ears in the marketplace, bringing them investment opportunities to purchase.”
There are differing views as to the biggest problem facing third-party managers. To Santora, it's finding the time to manage physical and financial aspects as well as client relations. Greninger cited an understanding of tenants' and owners' needs as the biggest challenge facing third-party managers.
Adapting to rapidly changing economic and technological conditions, not to mention retaining good employees, are also problem areas. Keeping an eye on the future while meeting the increased demand for services and, at the same time, keeping fees leveled or reduced also keep property managers up at night.
From an industrial owner's perspective, Gates questioned how much value third-party managers can truly add. “Owner/managers will have more flexibility in responding to customers' needs in a world where customers will pay for more flexibility,” Gates said.