With net operating income in many office real estate portfolios flat or falling, property managers are under pressure to perform the difficult balancing act of cutting costs while keeping tenants happy.
The challenge is a formidable one. A stagnant leasing market has left some sub-markets in Atlanta and Denver, for instance, with vacancy rates in excess of 20%. To make up for the bottom-line losses in rental revenue, property managers must resort to an assortment of aggressive measures: renegotiating with energy providers, streamlining administrative expenses via Internet-based programs that track every penny spent on maintenance, taking advantage of economies of scale to secure better deals with vendors and, in some cases, cutting fat from payrolls by downsizing and restructuring their workforces.
“Doing more with less has become more prevalent in the last few years,” says Joseph Lagano, Cushman & Wakefield's managing director of asset services in Midtown New York.
But that's a tall order given the large holdings of many owners, which may explain why the solutions are so varied industry-wide. Some initiatives focus on wringing out costs across large portfolios while other programs are designed to boost tenant retention via improved management efficiencies at each building.
Case in point: Equity Office Properties Trust has unrolled its EOPlus to consolidate the company's property management operations and save about $100 million a year. Half of the savings will be passed on to tenants in the form of lower operations bills.
Equity Office is not alone in its quest to cut costs. Many third-party property managers and other real estate investment trusts (REITs), such as CarrAmerica Realty Corp. and Cousins Properties Inc., say they also are re-evaluating how they run their buildings, although both suggest that taking property managers out of buildings would ultimately cut service to tenants and weaken their office portfolios.
The nation's Goliath REIT, with more than 700 buildings comprising more than 125 million sq. ft. in its portfolio, EOP this year has begun to roll out a new property management strategy nationwide. The “EOPlus” program was tested in Boston and Atlanta in the late 1990s. It cuts the number of national EOP offices from 150 to 50 and will ultimately result in about a 15% cut in EOP's property management workforce when the transition is complete in 2004.
To streamline building management, EOPlus creates centralized property management offices and divides up tasks that generally fall on a single building manager — such as accounting, answering tenant calls, tracking maintenance, procurement — and divides them among specialized teams of accountants, engineers, maintenance workers and buyers.
The program also calls for a reduction of vendors from 950 nationwide to 80. Instead of piecemeal janitorial services and building supply contracts for each building or each market, Equity Office plans to use its sheer size as an advantage to garner better pricing. “We are really trying to manage our properties on a portfolio level instead of a building-by-building level,” says Peter Adams, EOP's executive vice president of strategic planning and operations.
Adams admits that the plan was met with some internal resistance because it is such a dramatic departure from the traditional way buildings are managed, but he says feedback from tenants suggests that their needs are being met more expediently. In addition, Adams believes that property managers can actually interact more with tenants, even if they are in an off-site office.
“It's not about where your desk is, it is about what you are doing with your time,” he says. “Because we have taken many of those duties away from the property managers, they have more time and incentive to manage the buildings by walking around them. The vendors are seeing them more, and the tenants are seeing them more.”
EOP piloted the program in the late 1990s, but when it began phasing in the program nationally this year, most landlords were trying to find ways to cut costs. “It happens to be a good thing to be cutting, but it is more coincidental,” Adams says.
A Contrarian View
Still, the EOP model is not universally embraced. Some industry professionals resist the notion of taking property managers out of the buildings they manage for fear that tenants will lack service.
John Combs, a former Insignia/ESG property management executive who now is a principal with Los Angeles-based RiverRock Real Estate Group Inc., a three-month-old startup that manages more than 3 million sq. ft. of office space, believes that landlords who remove their managers from buildings will inevitably cut service.
“They are cutting back on staffing, and you find out that your building is only going to be vacuumed once a week. It's unacceptable,” says Combs. “Managers need to be at the properties so they can make quick responses and follow the events that take place in the building.”
RiverRock's model keeps property managers on site. But the firm has outsourced certain functions, such as accounting and information technology services. As a result, Combs says RiverRock's property managers are focused on two primary goals: service to tenants and landlords. He compares the company to the upstart airline JetBlue, which competes with mega-airlines such as American by keeping its overhead low, and thus, its ticket prices.
Like EOP, CarrAmerica Realty Corp.'s online InfoTrack and InfoCentre — which streamline the information flow between tenants, vendors, managers and landlords — were launched prior to the recession of 2001. When leasing activity took a nosedive, the economic climate heightened property managers' sense of urgency to cut operating costs.
According to Richard Greninger, managing director of operations for CarrAmerica — whose occupancy rate in the portfolio has fallen to 90% from a peak of 97% in 2001 — a decline in occupancy actually creates an ideal environment for renegotiating pricing.
For example, CarrAmerica uses its occupancy rate as leverage with utility companies to obtain reduced fixed charges. The company also has been the beneficiary of lower property taxes by ensuring that local taxing authorities use the income approach to determining building valuations.
“We are very aggressive in our appeal of real estate taxes,” Greninger says. “We are using occupancy dips and income reductions to get rebates in our property taxes. If people aren't exploiting that, they are missing a home run.”
In addition, CarrAmerica's property managers use the opportunity to contract with less expensive vendors. Because office buildings generate so much revenue for utilities companies and local governments, most vendors are interested in securing their own future revenue stream from successful buildings. “The important thing is to have your facts, and you have to be aggressive enough to beg for mercy,” Greninger explains.
Although he declined to provide specifics, Greninger says CarrAmerica has already “far exceeded” its declared goal to reduce its operating costs by $3.5 million in 2003. The savings were made possible by renegotiated contracts and the implementation of three software programs that give CarrAmerica the information it needs to negotiate those more favorable terms.
The programs CarrAmerica uses — InfoCentre, InfoTrack and Deloitte & Touche's AtlasTax — were rolled out over the past three years and are designed to cut down on administrative costs and track how the company spends money.
InfoCentre, software designed by Essention, is an online network that cuts down on administration costs by enabling CarrAmerica's employees, tenants, contractors and sub-contractors to communicate through a real-time network that links e-mail, voicemail, a call center and two-way radios to the same information.
InfoTrack is software that monitors energy costs per square foot. When rental income dips, utilities may concede to lower tariffs to help property managers offset the losses.
AtlasTax is software designed by Deloitte & Touche that coordinates and manages data for tax appeals in multiple markets. Many local governments are willing to give breaks on property taxes when rental income for an office building dries up, according to Greninger.
Tenants Taking Charge
In many cases, tenants are leading the push for greater cost efficiency in property management services. For example, Atlanta-based Cousins Properties, which owns and manages some 20 million sq. ft. of office space throughout the Southeast and the West, is responding to tenants' demands for more accountability on utility costs, says Dara Nicholson, senior vice president of property management for Cousins' office division.
California's energy deregulation debacle, which brought rolling blackouts and skyrocketing energy bills to the West Coast in 2000, has made Corporate America more mindful of its utility bills. Tenants' heightened awareness of energy costs puts pressure on property managers not only to secure the lowest possible pricing from merchant power suppliers, but also to run their buildings more efficiently, says Nicholson.
Investing in preventive maintenance, such as tuning up fans, utilizing natural light and using smaller heating and cooling units can reduce costs. “At a 10% capitalization rate, a real estate company can generate $2 to $3 in incremental asset value for each $1 invested in energy efficiency upgrades,” according to the National Association of Real Estate Investment Trusts.
Cousins also has implemented a property management procedure manual called “Cuz Way,” which sets standards for tracking utility bills, energy usage and mandates preventive maintenance to avoid costly emergency repairs. “You see a lot of tenants come back and request audits, so you better do a good job,” Nicholson says. “It keeps everybody honest, but it makes you work harder as a manager or a landlord.”
To measure efficiency, Cousins has implemented a corporate mandate that its buildings attain energy efficiency awards handed out annually by the U.S. Environmental Protection Agency.
This year, Cousins' Bank of America Plaza in Atlanta earned the Energy Star award. Nicholson says more efficient buildings will result in more satisfied tenants who pay lower utility bills. “That is going to be a direct payback to our tenants.”
Matthew C. Monroe is an Atlanta-based writer.