The U.S. real estate market has seen many ups and downs over the years. If you own property in the commercial market, you know how devastating it can be when values decline. But there are ways you can help ensure your properties turn a profit.
The value of commercial real estate often is a function of the property’s net operating income (NOI). NOI equals gross rental income less vacancy and operating expenses. One way to maximize NOI is to reduce expenses.
Commercial properties are often ripe with costs that could easily be reduced with a little vigilance. You might, for example, adjust energy-related expenditures, such as your automated energy management system. Don’t just set the start and stop times and forget about it. Rather, adjust the settings to take advantage of downtimes such as weekends and holidays.
A surprising amount of energy is consumed overnight, when buildings are essentially unoccupied. Train your cleaning staff to turn off lights when they finish a room, or install sensors that will automatically turn them off. Copiers, printers and other office equipment should also be turned off at night. And building fans and motors probably don’t need to run nonstop around the clock.
Implementing environmentally friendly practices may improve tenant satisfaction, while simultaneously boosting property value.
Speaking of tenants, when is the last time you examined your properties’ monthly utility and water bills to ensure that you’re charging your tenants properly for their consumption? Be sure to watch for unusual spikes in usage.
It can also pay to revisit your service contracts. Do your windows really need to be washed so often? Do driveways need to be blacktopped so frequently? Rebidding or renegotiating contracts may lead to cost savings, particularly if you take advantage of economies of scale by hiring the same contractor to service multiple properties.
Reconsider your internal maintenance, too. Do you take a preventive approach to maintenance that abides by a time-based schedule? You might fare better by adopting a predictive approach that relies on statistics and past experience to determine the optimal intervals for servicing equipment.
Other expenses worth re-evaluating include real estate taxes and insurance. As property values decrease, you should pay less in taxes and insurance premiums. But reassessments aren’t automatic. You’ll need to contact your county assessor and insurance agent for adjustments.
Although interest is not customarily part of the NOI equation, it can be a significant expense, depending on a property’s debt load. Rates are currently low, and banks may be willing to negotiate if you’re creditworthy.
Operate in tip-top shape
Another way to boost your NOI is to decrease vacancy. Careful management can result in lower carrying costs and quicker leasing. Consider visiting all your properties regularly to check for any problems that might delay leasing — such as a leaky roof or malfunctioning security system. Keep the premises clean and free of trash and pests. Ensure that maintenance continues on the roof, HVAC system, elevator and similar components so that they’re in working order for new tenants.
Keep in mind that, while it’s important to confirm that these systems are fully functioning, they don’t need to operate 24/7. As with occupied space, adjust the startup and shutdown mechanisms to reduce energy costs.
Keep tenants happy
It’s much more economical to hold on to existing tenants than to land new ones. Retaining tenants requires keeping them happy.
Regular communication is critical. Answer your phone and respond to e-mails promptly. Give tenants both your office and cell phone numbers. Also consider conducting annual tenant surveys to determine whether they’re satisfied and if they see areas that could be improved. At the very least, a survey shows that you value the tenants’ opinions.
Your employees will probably constitute the front line of tenant relations. So, develop an incentive structure that encourages them to provide outstanding service. And then reward and recognize those who go the extra mile.
Finally, remember that janitorial and HVAC issues usually top the list of tenant complaints. By keeping a close eye on these services, you can preempt many problems.
Make it pay off
It is possible to turn around declining property values. But it’s important that you be proactive with your properties by staying atop needed maintenance and reining in your expenses.