While the U.S. real estate market is currently enjoying an upswing in most areas, it has seen numerous downturns over the years. Whether the market is up or down, commercial property owners and investors continually look for ways to enhance profits. Here are some suggestions to consider.
Keep expenses low
Commercial real estate is often valued as a function of the property owner’s net operating income (NOI). NOI is the gross rental income, minus vacancy and operating expenses. One way to maximize NOI is to reduce expenses, such as the following:
- Consider altering your automated energy management system. Instead of just setting the start and stop times, adjust the settings to take advantage of weekends, holidays and other downtimes.
- Buildings also consume a surprising amount of energy overnight, even when they are unoccupied. Have your cleaning staff turn off lights when they finish a room, or install sensors that will automatically turn them off. Implementing these types of environmentally friendly practices may improve tenant satisfaction, while simultaneously boosting profits.
- Review your properties’ monthly utility and water bills to ensure that you are charging tenants property for their consumption. Be sure to watch for unusual spikes in usage.
- Revisit your service contracts. Perhaps windows may not need to be washed so often, and parking lots may be blacktopped less 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 follows a time-based schedule? Try adopting a predictive approach that relies on statistics and past experience to determine the optimal intervals for servicing equipment.
- Other expenses worth re-evaluation include real estate taxes and insurance. Generally, as property values increase, so do real estate taxes and insurance premiums. Closely review both with the county assessor and your insurance agent to determine whether or not the increases are justified.
- Although interest expense is not normally part of the NOI equation, it can be a significant expense depending on a property’s debt load. While interest rates are still low, banks may be willing to negotiation if you are creditworthy.
Another way to boost your NOI is to increase occupancy. Careful management can result in lower carrying costs and quicker leasing. Consider the following:
- Visit all your properties regularly to check for any problems that might delay leasing, such as a malfunctioning security system or leaky roof.
- Keep the premises clean and free of trash and pests.
- Ensure routine maintenance of the roof, HVAC system, elevators and similar components so that they are in working order for new tenants.
Remember, while it is important to confirm that these systems are fully functioning, they do not need to operate 24/7. As with occupied space, adjust the start-up and shutdown mechanisms to reduce energy costs.
Retain happy tenants
It is 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.
- Consider conducting annual tenant surveys to determine whether they are 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 are usually the front line of tenant relations. 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. Keeping a close eye on these services can prevent many problems.
Profits ahead for Property Owners
Staying on top of needed maintenance and monitoring your expenses is important whether commercial property values are declining or rising. By following the above suggestions as a property owner, your properties should be on the road to optimal profitability.