Contrary to popular belief, smart property managers can always realize income growth - by Chris Mellen

Christopher Mellen, The
Simon Cos.

I guess I’m a bit of a contrarian when it comes to questions of the economy and the long-range outlook. That tendency comes out as a result of my more than three decades in the property management profession. In short, contrary to popular belief, upturns or downturns, smart property managers can always realize income growth.

In this new year, we’ll continue to see an economic improvement. The market will continue to improve and multifamily will again in 2016 lead the way with vacancy rates going even lower than they’ve been and rents remaining strong. We’ll see a continuation of the dichotomy between CBD and suburb in the face of shifting demographics. Millennials, this generation where rental is king, will continue to seek the walk-to-the-action of their live/work/play lifestyles and Boomers will continue to sell their homes to be near their kids and adapt that lifestyle themselves.

On the office side of the equation, the market also continues to strengthen, especially in the CBD. But this is true as well in the beleaguered suburbs. While we’re still experiencing a 14 or 15% suburban vacancy, which is certainly not good, we’re starting 2016 with a scenario that’s brighter than at the end of the recession, and I see in both downtown and in the suburbs vacancies continue to whittle down.

As for 2017, the office side of the market will need watching, as I expect the sector will experience a softening. The good news here is that there’s not the same supply or new construction we were left with at the start of the last downturn, which will at least minimize the burden of a lot of new unleased property.

As for multifamily, the sector will be riding the crest of this year’s expanding rental market, especially as driven by the above-mentioned demographic shifts. Nonetheless, while the sector is poised to best sustain any softening, I do have reservations for 2017 as the economic tide slowly starts to turn and we enter a year of equilibrium.

But here’s where my contrarian thinking kicks into gear. While the fortunes--literally and figuratively--of so many commercial real estate market segments are tied to the ebb and flow of the economy (ask any broker), property managers are uniquely positioned to prosper in all kinds of conditions. I really do believe that, for creative property managers, there’s actually job security in downturns.

It all goes back to the basics and the essential value proposition, expressed in the business with this call to action: “Maximize income and minimize expenses.” And there are a number of techniques to accomplish this beyond the low-hanging fruit of raising rents (never a popular concept and even more so in tight times. Besides, the local market always confines you to a narrow range of increases).

Downturns offer a prime opportunity for creative property managers to not only reduce the negative bite on NOI, but to sustain or actually increase income. To do so, it’s essential that we review every component of the income/expense statement to make sure we’re getting the biggest bang for our buck. For example, we should review our tenant-selection criteria, be it for multifamily, office or retail, to ensure that we’re employing the best techniques in selecting credit-worthy tenants with a good business history.

Other income/expense candidates for review are energy efficiency and utility expense control. Properties benefit in savings from retrofitting lighting fixtures, HVAC systems, control devices and windows. Also, although we can’t control the amounts we’re charged for utilities, we can lower energy and operating costs by buying electric, gas and oil in bulk. These changes in operational and maintenance procedures can provide immediate cost-saving opportunities and increase the building’s value.

Rehab of a property will also affect the building’s operating expenses. Maintenance costs increase as a building ages and becomes less efficient. Inefficient mechanical systems and hard-to-clean flooring are just two items that, if upgraded or replaced, can reduce expenses. Property managers can also rebid contracts, especially as labor costs go down, in a slowing economy. Finally, tenant turnover time can be monitored and planned closely to minimize loss of rental income due to vacancies.

Beyond expenses, diversification also offers a strong hedge against a slowing economy. I see a trend of single-family home management, and I have colleagues in the industry who are looking at that area as a niche market even now. It’s a particularly viable alternative in markets such as the Sunbelt, where foreclosure of these assets has been problematic. In fact, it should be noted that IREM offers educational programs for professionals looking to learn more about this area of diversification.

Of course, there are the other avenues to diversity, such as office managers expanding into multifamily or retail to bring added value to those assets.

Greater prosperity may not always be possible in slow times. But property managers have it within their grasp to enhance the value of the properties they manage and expand their wealth of knowledge to new assets in need of professional handling. In so doing, they can ensure their own success and grow their reputations--in good times and bad.

Christopher Mellen, CPM is vice president of property management at The Simon Cos., Braintree, Mass.