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Whether you're in a landlord's market or a tenant's market, you face a common challenge: contending in an increasingly competitive landscape while keeping operational costs down. Savvy asset managers know when to make concessions, when to launch capital improvement programs, when to roll out new marketing initiatives and when to sit still.

The art of thriving in an increasingly competitive landscape while keeping operational costs down is different in a largely-recovered commercial estate landscape than it was when markets were at rock bottom and property owners were looking for miracles to stave off bankruptcy. Improving market conditions are driving real estate tax increases, tenants are demanding more amenities and labor costs have increased across the board.

“Property owners looking to compete while staying cost-conscious should look not just at expense management, but also for ways to improve the overall health of their P&L,” says Yvana Rizzo, senior vice president of asset management for Resource Real Estate, a global firm specializing in direct real estate investments, commercial real estate lending and global property securities. “Don't underspend. If you take shortcuts, your tenants will notice. There are plenty of ways to save money, but it should never come at the price of good property maintenance.”

SHOULD YOU GO GREEN AND GET HIGH-TECH?

The concept of going green with sustainable construction, design and various other practices is not new—but it's not going away, either. Indeed, Cushman & Wakefield reports that sustainable real estate practices are a top priority for anyone who owns or occupies commercial property. Consider the statistics:

In 2014, 88% of participants in the GRESB survey said they had sustainability objectives and 80% said they integrate their sustainability objectives into their overall business strategy. McGraw-Hill Construction reports lease-up rates for green buildings typically range from average to 20% above average and multifamily green residential projects were one of the earliest sectors to recover after the 2009 downturn, with 23% growth in 2010. And LEED-certified buildings have been proven to use 25% less energy and see a 19% reduction in aggregate operational costs in comparison to non-certified buildings, according to a GSA survey.

“Establishing initiatives and programs to make a property more sustainable can have a positive impact not only on the building, but also on its tenancy,” says Steven Froot, JLL regional manager for property management in South Florida. “For example, ramping up recycling programs, upgrading lighting systems, adding electric car charging stations and more bike racks and reducing energy use can decrease utility expenses. Green roofs can make another excellent investment, as they absorb rainwater and also reduce heat levels to the building.”

At one of the properties JLL manages in South Florida, Miami Tower, Froot completed a lighting retrofit that translated to significant energy savings. The iconic 47-story tower that lights up the Miami skyline installed an LED lighting system that has reduced related lighting energy usage by 92%, saving tenants and the building's owner more than $260,000 per year in energy and related operating costs.

GFI Capital Resources affiliate Irongate Management, a property management firm with a portfolio in New York, Georgia, Kansas, Missouri and Michigan, is progressive in its green practices. Beyond offering recycling bins and a place to dispose of Christmas trees, Nia Walters, regional vice president for Irongate, says communities her company manages are also cognizant of water usage, even using landscaping that requires minimal water, among other initiatives. The list of green practices that property owners can deploy is virtually endless, she says, and often not costly.

“There are many environmentally responsible practices that can be adopted by property owners that are good for both the planet and your bottom line,” says Rizzo. “Climate-appropriate landscape designs and LED lightbulb conversions have helped us to reduce consumption and keep energy costs down. We have also recently begun offering residents remote access climate control in their units. The feedback has been overwhelming—not only do residents want to conserve energy, they like to save money too.”

After price, parking and location, 90% of BOMA members say access to advanced communications ranked top on their list. Over one third of respondents report the topic of access to advanced communications service is raised in 75% of negotiations with prospective tenants. That's leading many owners and building managers to expand their network infrastructure options and use technology as a competitive edge and marketing took for attracting and retaining tenants.

“Access to advanced communications for tenants is a key factor when selecting a space for their business,” says Linda Warda, property manager at Farbman Group, a company that manages more than 20 million square feet of office, retail, multifamily and industrial space throughout Southeast Michigan. “When we equipped our buildings with advanced communications, it generated a lot of excitement among our tenants. Our tenants needed a highly reliable, all-in-one solution that would allow them to quickly and easily receive Internet, phone and cable television services—without reaching out to different providers.”

FIVE BEST PRACTICES FROM AN OFFICE PRO

Whether you're managing an office tower, a multifamily community, an industrial park or some other commercial real estate asset, there are some general rules of thumb that will help you compete with other properties in your region without breaking the bank. Although it's daunting when neighboring properties launch multimillion-dollar capital improvement campaigns that you can't match, there are baseline tips to make the most of your property even with budget constraints.

Froot manages buildings like Southeast Financial Center, 701 Brickell, 810 Brickell, Miami Tower and 1221 Brickell in South Florida. He starts his recommendations with a focus on amenities and tenant relations. Specifically, Froot suggests offering amenities in the building that enhance the tenants' experience and implementing a strong tenant relations program, which should include making regularly scheduled visits to tenants, to make sure they are highly satisfied. He also has several other best practices that help balance the ability to compete with profitability.

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“Ensure excellent curb appeal at the property to help create a positive first-impression when prospective tenants are touring the building,” Froot says. “Invest resources in creating an energy-efficient building to make it more affordable for the tenants and ultimately, for the property's ownership as well. To compete and stay cost conscious, regularly bid out services to ensure you are getting the best service pricing in the industry. Hiring a competent and experienced property management firm that can act as an extension of the ownership can help achieve this goal.”

Froot put these best practices into practice at a 34-story trophy office asset on Brickell Avenue that JLL manages. The Brickell submarket office vacancy stands at about 15%. “We were able to be very cost-conscious by arranging a group bid for vendor services to get better pricing for the client,” Froot says. “Additionally, we utilized some very strategic sustainable programs to reduce energy usage at this particular building and that had a positive impact on its operating expenses.”

11 BEST PRACTICES FROM MULTIFAMILY EXPERTS

There's fierce competition among multifamily assets in most markets—even tight markets where vacancy is low. Concessions are largely a strategy of the past in most cities and rents are rising. But that hasn't watered down the competition.

Barbara Gaffen, CEO of Prime Property Investors, a Northbrook, IL-based real estate investment firm, has seen this first hand with Clover Village Apartments serving Notre Dame University in South Bend, IN, an asset that has faced increased competition from newer product in the marketplace over the past two years. Gaffen competed by stressing Clover Village's superior location right next to the campus, larger unit sizes, more extensive grounds and common area amenities and better monthly rental value.

“Stress your properties' best features other than rent price, service and responsiveness to work order requests,” Gaffen says. “Always get back to a resident with any question or request within a few hours. Treat residents professionally and accommodate simple easy requests. Create a pleasant environment to live in, so residents really don't want to move at renewal time.”

Walters manages Villas at Carrington Square, which is located in the prime Kansas City submarket of Overland Park, KS. With 4,000 new multifamily units coming online in very close proximity to her property, sustaining high occupancy rates was something of a challenge.

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“Overnight, we were no longer the newest, shiniest product in the market,” Walters says. “Customer service is the one thing that set us apart during this challenging time. While the majority of the Overland Park submarket experienced high turnover and extended vacancy loss, we achieved a 67% retention ratio by taking care of our residents and offering concierge-level service.”

Walters competed with cost-consciousness in five key ways. First, she coordinated low-cost events for residents, such as a weekly coffee hour that regularly attracts 20 residents and only costs $10 and adds no labor costs. She also holds donation drives—blood drives, coat drives, school supply drives, etc.—to give tenants the opportunity to help their communities. Often, she offers a small rent concession and encourages residents to give as much as they can by offering raffle tickets for each item donated.

“Staff involvement in outreach marketing is a must—and this includes the involvement of the maintenance staff,” Walter says, noting that she's trained her team members to capitalize on the goodwill that they generate. “When they receive compliments from a tenant, they know that that is a good opportunity to ask the resident to refer the property to others. This helps us to keep marketing expenses to a minimum and empowers our residents to play a role in choosing their neighbors.”

Of course, keeping the property clean is a must. Irongate has a “Disneyland philosophy” that essentially states its communities don't have to be the newest kid on the block, but they will always be the cleanest. Her last piece of advice: think outside of the box when considering additional amenities at little or no cost. For example, Irongate started a free library exchange at one of its properties. The residents borrow and return books on the honor system, and enjoy the access to new reading material.

Rizzo has a couple of best practices of her own: “Avoid employee turnover by investing resources in hiring, training and retaining the right people. There are huge expense savings from getting this right the first time,” she says. “Look at your topline first. While expense management is important, a robust revenue stream is more important. Seek out opportunities to increase your income, rather than focusing on cutting costs to the bone.”

KEEPING INSURANCE, TAX COSTS IN CHECK

No discussion of cost-conscious competition would be complete without touching on the insurance equation. When building owners or managers sit down to review their policies, they should look at the deductible per building. A 5% deductible is the most common, but some carriers offer a 3% option, according to Evan Seacat, senior director at Franklin Street Insurance Services in South Florida.

“Is it worthwhile to pay a higher premium but less out of pocket when a hurricane hits? That depends. Let's say a building is worth $10 million. The deductible will be $200,000 less with the lower percentage figure. What I see most often is that building owners and managers don't take loss-of-rents coverage. They do not want the added premium. If there's damage to the property, they expect to relocate tenants, but keep them on the property and paying rent. That's a hope, not a plan.”

Rizzo agrees. The cost of insurance can be burdensome and can quickly escalate without proper precaution. Losses will inevitably lead to high cost premiums, which can be detrimental to the bottom line. She believes that loss prevention is the key to keeping these premiums in check. “With an in-house loss control specialist fully dedicated to this effort, we have been able to implement portfolio-wide best practices and provide training to our onsite teams on how to identify and mitigate everyday commonplace risk,” she says. “While we cannot eliminate risk entirely, we certainly put forth a strong effort to minimize it.”

Finally, you can conduct a cost segregation study, an approved process that allows real estate owners the opportunity to accelerate depreciation on certain elements of improved property. Just about every commercial property owner can benefit from applying cost segregation. This procedure results in an increase in annual after-tax cash flow through accelerated depreciation that you can apply now, going forward, and going back all the way to 1987.

“I believe that if you are not consistently looking out for the owner of an asset by staying at the forefront of market values and Broker Opinion of Values, you are doing them a disservice,” says Walters. “If a taxation evaluation is not being completed on an annual basis you may be paying more than you should be. This is very much market-driven, so it's not a universal issue. The simplest answer would be to know the owner's expectations regarding the intended hold period of the asset and weigh the cost and benefit of all capital projects.”

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