A bill recently introduced in Congress will — if passed — offer commercial real estate an excellent opportunity for profit enhancement. By abbreviating the depreciable life of tenant improvements from 39 years to 10 years, H.R. 1030 “would enable property owners to more easily adapt to the specific floor-to-ceiling needs of new occupants,” says NAREIT president and CEO Steven Wechsler.
According to Wechsler, most owners of commercial rental real estate must routinely reconfigure, change or improve their rental space to suit the needs of new or existing tenants. “Enactment of H.R. 1030 will enable REITs and publicly traded real estate companies to modernize building interiors so tenants may occupy more efficient and effective space,” he says. “And, it will allow companies to make those improvements in a more cost-effective manner.”
The NAREIT-supported bill, sponsored by U.S. Representative Clay Shaw, R-Fla., would shorten the depreciable life of tenant improvements to 10 years. In an effort to help its members, NAREIT recently issued a report outlining profit enhancement opportunities for 2001. Strategies outlined in that report include:
- Standardizing lease terms and other repetitive activities;
- Outsourcing back office functions for lease management, IT, accounting, legal, etc.
- Investing in technology to reduce costs and optimize effectiveness;
- Creating property benchmarks to identify opportunities for revenue enhancement and cost reduction;
- Taking advantage of group purchasing programs to obtain better prices and services;
- Leveraging the customer base (or, in the case of malls, customer traffic) to identify ancillary income opportunities.
Differing opinions
Of course, not everyone agrees these or other strategies are necessary. “If you're good, you're being resourceful all the time,” says John Bucksbaum, CEO of Chicago-based General Growth Properties (GGP). “You're trying to enhance revenues and be conscious of costs all the time.”
According to Bucksbaum, GGP's company-wide incentive program has helped the firm reach its current position among top-performing mall REITs. “Our incentive program is based on the cash value added at every stage from the top to the bottom of the company,” Bucksbaum explains. “Most people in the company are associated with a specific property or properties, making it easy for our program to focus on similar goals.”
“If you're good, you're being resourceful all the time … trying to enhance revenues and be conscious of costs all the time,” says John Bucksbaum
While the incentive program does compare the amounts spent at one of the company's properties with specific revenue brought in, it is not necessarily a benchmark. “Each of our properties in each of the markets we service is different,” Bucksbaum notes. “HVAC operations and costs differ greatly between properties in Florida or Arizona and a place like Michigan.”
As for the other strategies outlined by NAREIT, Bucksbaum admits he sees no need for major outsourcing initiatives. GGP does outsource for many services such as security and even maintenance but does so only in certain markets, according to Bucksbaum.
“We're very happy with our ‘back office,’ which, for the most part, has proven to be cost effective,” he says. “Of course, we've standardized some of our procedures. There is no need to re-invent the wheel in situations that you encounter every day. For example, we sit down with a retailer to create a template for a lease we can both agree on for the next three years or longer. From that mutually agreed-upon template, our legal department draws up the final lease papers.”
Cutting costs
To deal with escalating energy costs, GGP actively works with utility companies and attempts to take advantage of the rebate programs offered by several. At Harwood Management Services, however, energy efficiency plays a much more prominent role. “We have been working on formulating energy improvements for several years,” says Doug Walker, president. “I want everyone involved in the designing, planning and operating of our buildings to think about reducing waste and increasing efficiency.”
As a management firm Harwood has been able to reduce operating expenses. This achievement lowers operating expenses for tenants while giving Harwood flexibility in rental structures. Lowering utility costs also frees up cash flow for other operations, and leads to improved tenant retention. Why? Because new tenants benefit from these cost savings and don't want to move, Walker explains. And there are other perks. In 2000, the U.S. Environmental Protection Agency honored Harwood as “Commercial Real Estate Owner of the Year” for its achievements in reducing energy use.
Using technology
“Reports of the death of technology in real estate are greatly exaggerated,” says Kristina Inman, co-founder of Real Estate Connect, the industry's largest technology conference. “The real estate industry continues to show incredible resilience when it comes to its continuing investment in new technology and infrastructure.”
Technology is often seen as the means to protect margins squeezed by greater competition. “Ongoing investment in technology is imperative,” says Sherry Chris, vice president of network services for Canada's Royal LePage.
“Wireless applications head the list of innovation for the industry,” according to Gregg Larson, executive vice president of Firetap Communications, a specialist in wireless local area networks for the real estate industry.
Finally, there are other, somewhat more drastic, cost-cutting strategies. For example, Associated Estates Realty Corp. recently announced plans to cut general and administrative costs by an estimated $3 million by the end of 2001. According to CFO Kathleen Gutin, the Ohio-based REIT closed its Chicago and Columbus offices and enacted other cost-reduction steps, including cutting professional and consulting fees, eliminating remaining redundancies, and examining profitability by functional areas.
Mark Battersby is a Philadelphia-based writer.