For the past few years, sinking cap rates have made it relatively easy for real estate investors to realize positive returns on their office market investments. But today, owners are beginning to recognize that the opportunity to make a profit on a quick turnaround isn't as easy as it used to be. With cap rates dropping to what most would agree are the lowest they will go, real estate investors recognize that they can no longer count on compressed cap rates to help them reap profits from their assets.
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Sooner or later, the only opportunity to realize profit from a building will come from a proactive management plan. Building systems, operational efficiencies and cost-effective and time-efficient procedures employed by a proactive management team will be the best way for an owner to ensure they gain a return on investment.
That is why the management team should be viewed as a partner to the owner, not just at the completion of an acquisition but throughout the entire acquisition process.
Management service providers know better than anyone how buildings operate. They know where potential issues lie and what it will take to fix them. Service providers understand pricing and the costs associated with the systems that make a building function at its peak level of performance and efficiency.
This level of expertise is also critical to ensure that underwriting is done correctly and that none of the assumptions made for short or long-term profitability are unrealistic.
Moreover this expertise can help ensure that all potential issues or problems are recognized and understood prior to purchase so that nothing is overlooked or missed by a potential new owner.
Even now, every time a property changes hands, the new building owner and management team face the challenge of finding ways to reduce operating costs, increase asset value and off-set costs. So what should a potential or new building owner look for? Here are some areas that PM Realty Group considers key to unlocking or realizing a building's true value:
The people -- One of the first areas to examine is the engineering staff and how effectively and efficiently they operate the building. The owner needs to know that the right team with the right talent is in place. While technical skills are important, customer service skills are a critical component of an engineer's success.
Determine whether the person currently in charge of engineering is a "telephone engineer" or a true engineer. Someone who knows who to call rather than knowing what to do is a disaster waiting to happen. The engineer is a key player of the management team and makes operational decisions on a daily basis that impacts utility consumption, which is the biggest expense of the building. That is why an owner should expect and demand the best available talent. If not, it's money down the drain.
The building -- From there it's important to take control of the building. Interview tenants, determine levels of customer satisfaction, identify areas of concern and develop an action plan to ensure that service providers such as janitorial, security, elevator and landscape contractors are all on the same page with management.
Ensure the building's electrical, mechanical and vertical transportation systems are operating at maximum efficiency. This includes ensuring the building hours of operating conform to lease provisions and that comfort control, air distribution and controls systems are properly calibrated and maintained.
Reducing energy consumption is a critical component of adding asset value. Lighting is an often-overlooked area that is considered "low-hanging" fruit. Take advantage of low-cost energy saving measures such as lighting retrofits, rebates and refurbishments.
It is also advantageous to look at the option of installing variable frequency drives on air handling units, cooling tower motors, circulating pumps and chillers that can maximize the operation of many building systems.
The history -- How well maintained are the building's records and files? Is there a comprehensive preventive maintenance program in place? Can you easily identify and document whether building equipment has been properly maintained? If not, you may compromise the maximum sales price during the disposition process.
Major capital expenditures for equipment upgrades such as elevator modernizations, new chillers and roof replacement can be significant and could very easily jeopardize the sales transaction.
What happens when you've done an excellent job maintaining and operating the building, but it still isn't enough to realize a significant savings and lower operating costs? What if after all the "low hanging fruit" projects are either planned for or completed and it still isn't enough to create any measurable increase in asset value for the client to maintain market competitiveness?
PM Realty Group encountered that situation at Sorrento Towers, a 264,700-square-foot project consisting of two six-story Class A office buildings constructed in 1989. At that time, utility operating expenses averaged $2.60 per square foot with a low rate of $2.33 per square foot in 2003 to a high rate of $4.07 per square foot in 2000 when the utility rate jumped 62 percent. The owner needed to see operating costs reduced by a minimum of $.50 per square foot.
The existing DX central plant, the heart and soul of the building, utilized inefficient reciprocating compressors and a manual control system. Although the central plant was far from reaching its useful life, PM Realty Group evaluated all the various alternatives to this costly operation. The team identified a new type of oil-less chiller system and automation system that could control and reduce the escalating utility costs. The team proposed a complete central plant retrofit to the client, a significant capital expenditure.
However, it was only recommended and approved after a complete and thorough energy analysis demonstrated the payback would be less than two years. This is especially important in today's market considering the current short-term exit strategies of many owners today.
The result? The two new central plants, at a cost in excess of $380,000, qualified for a 50 percent utility rebate. In addition to the rebate, the new system reduced energy costs by more than $.50 per square foot per year, compressing the payback to less than two years.
Now more than ever, to continue to meet the value add demands of building owners, property management and engineering must be considered a key partner in the solution. Like any fine automobile or timepiece, the care taken to properly operate and maintain a building will ensure long-term customer satisfaction, enhanced operations and increased asset value.
Rowen is senior vice president/operations and engineering services for PM Realty Group.