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Marketing distressed properties.

Look at any skyline in almost any U.S. city, and chances are you will see at least one distressed" office property. The economic and political forces that sent the real estate industry on a costly roller coaster ride during the 1980s have left property owners and developers throughout the country with empty, unproductive office buildings and bleak balance sheets.

Sometimes, the distress is obvious. An older, run-down building with extremely high vacancy rates looks distressed. In most cases, its owner has been either unable or unwilling to reinvest cash in needed maintenance or improvements.

But there are also a number of beautiful, new buildings that have gone back to the lender through foreclosure and many others on the verge of doing so. The reason has been well documented. overbuilding brought vacancies up and held rents below what owners needed to service the debt on their properties. While these buildings may look better than the older, run-down ones, they are no less distressed.

The solution, in either case, is obvious. Lease more space. However, any owner-whether a developer, limited partner, or lender-who is depending on the old school" of office leasing to nurse a distressed office property back to health will be disappointed. A sign, a few marketing flyers, and a little cold calling simply will not be enough to go up against an extremely competitive market and the property's negative image.

Once a building earns the reputation of being distressed;' the brokerage community becomes concerned about the owner's ability to pay its commissions. New tenants doubt the owner's commitment to follow-through and service. Existing tenants, worried about being the only ones left in the building and probably already unhappy with their service, start thinking about moving.

Despite the desperate picture this scenario paints for owners and managers of distressed office properties, the situation is not hopeless. In fact, one of the most positive results of the commercial real estate crisis has been the increasing sophistication of the office leasing business. This "new school" of office leasing places more emphasis on marketing, backed up by research, planning, tenant service, and the ability to act quickly.

Step 1: Motivate and educate the owner

Very often, the most difficult part of marketing a distressed office property is convincing the owner how much the space is really worth in any given marketplace. Unless the owner is motivated to make the property competitive, a distressed office building will remain distressed.

The marketing team's best tool in this effort is market knowledge. An agent must be able to show the owner how much and what kind of competing space is available. The agent must also educate the owner about what kinds of leases are being signed and what tenants are actually paying for space in competing properties.

The owner must be given a clear picture of what property improvements will be needed to attract and keep tenants. This will mean working closely with property managers to identify the most urgent problems, outline costs, assign priorities, and develop a schedule for completing them.

Step 2: Get the property market-ready

Even a new property that "shows" well will benefit from a close inspection and fix-up before being repositioned in the market. The marketing team must become as familiar with rent rolls, existing lease expirations, financial performance, maintenance programs, and structural or environmental problems as it is with floor plans, decor, and amenities. Again, a close working relationship with the property manager is essential.

Once all the details about a property's structure, components, and finances are collected, it can be helpful to assemble them into a property presentation booklet. Designed more for the marketing team than for potential tenants, the booklet allows agents to answer the majority of tenant questions on the spot. This gives tenants the answers they need to make decisions more quickly. It also reflects well on the owner and management team, giving tenants an indication of the high level of service they can expect should they decide to lease space in the building.

Particularly in the case of an older, run-down building, getting the property market ready will include some obvious physical improvements. However, it is important to understand which improvements will be most cost effective. What are the least expensive changes that will have the most impact on prospective and existing tenants?

Start with a good, thorough cleaning. Then look to the exterior. Repair a damaged lawn; it may be as simple as watering or mowing it. Clean up the landscaping, replacing dead plants. Repair or resurface the parking lot.

Then move inside. if carpet in common areas iS worn or outdated, replace it. The same goes for painted walls, wallpaper, or artwork. If there are obvious problems, such as a leaky roof, fix them. And do not forget to replace the water-stained ceiling tiles. If light fixtures are missing, replace them.

Finally, take a close look at the vacant space. Even in new buildings, prospective tenants can be very impressed by an attractive entry or elevator lobby and then walk into a vacant office and find it cluttered with maintenance supplies or construction materials. Vacant spaces should be clean, bright, and open.

If vacant space had previously been divided into clusters of small offices, tear them out so the space can be built out to suit a wider variety of tenants.

Distressed properties already have enough strikes against them. Once a marketing team gets a prospect in to look at the property, it must be sure the property will help sell itself.

Step 3: Rebuild confidence of existing tenants

Tenant retention is an obvious part of any property's marketing and management plan. In the case of a distressed property, however, the job goes way beyond lip service. Tenants have probably seen a number of leasing agents and property managers come and go. They have heard plenty of promises, many of which probably have been broken.

They are concerned about what the building's negative reputation is doing to their own company image. They want to believe the new marketing team, but they wonder what will happen if the building is sold or goes back to the lender.

When trying to allay these concerns, the most important thing to recognize is that, at any given time, 20 to 30 percent of a building's tenants are out looking for other space. That means a leasing agent must be prepared to do plenty of hand-holding and reassuring. It also means making no empty promises. These tenants need proof things are going to be different.

Start by introducing the marketing team and property manager to all existing tenants. Ask what problems they have had. Answer their questions. Let them know whom to call for help or service requests. And, above all, be sincere.

The building's property manager can be a marketing team's best ally in this effort. Therefore, it is essential that he or she be a "people person," who is able to relate to everyone from CEOs and office managers to mailroom clerks and give them straight, realistic answers to their questions and concerns.

Another way to build rapport with existing tenants is to show them what changes and improvements are being planned for the property and the schedule of when they should be completed. It is also helpful to get tenants involved in the improvements. Ask their opinions about carpet, wallcovering, or artwork choices.

Demonstrate the owner's commitment to sound property management practices. Implement a preventive maintenance program, and give tenants opportunities to see the management staff actually doing something in the building on a regular basis.

Perhaps most importantly, make it a policy to handle all service requests within 24 hours, and then enforce it.

Step 4: Re-establish credibility in the marketplace As stated earlier, a distressed office property carries a great deal of negative baggage, collected from past dealings with tenants and the brokerage community.

Perhaps the owner has developed a reputation for being unwilling to make deals or has quoted rates that were too high. If the previous leasing agent was an unknown, cooperating brokers may have had trouble getting commissions paid.

The only way to combat such damaging perceptions is to address them head-on. It helps to employ a credible, well-respected leasing company, whose word and reputation are trusted in the brokerage community. Then begin cold calling immediately, going first to the most active brokers and targeted tenants.

Tell targeted brokers and tenants who is now in charge of marketing, leasing, and managing the property. Assure brokers they will be paid market commissions for cooperative transactions. Let them know how much and what kinds of space are available in the property. Do not waste their time with fluff; address their negative perceptions right away.

Particularly if rates have been too high or have been perceived that way, acquaint brokers with current, more competitive quoted rates. Also let them know that the marketing team and owner now plan to be very aggressive in negotiating lease rates and terms.

If the property's physical condition has been a stumbling block, explain what is already being done to improve it and when further improvements are planned.

In addition to cold calling, a direct mail marketing flyer can be a quick, effective way of repositioning a property or calling attention to changes in its management or marketing approach. However, such flyers are worthless unless they are followed up either by phone or in person.

The goal is to get the market talking positively about the property and its repositioning. Move prospects past everything they may have heard or thought about the building before and pique their curiosity enough that they will want to take another look at the property themselves. Step 5: Be responsive Reminding people about the value of responding quickly to requests from brokers or potential tenants should not be necessary. After all, it is simple courtesy and common business sense.

However, it is surprising how often agents let several days pass before delivering requested proposals or leases. What is not surprising is how many of those hot prospects who have been left hanging find another deal they like better while they were waiting. Tenants also view an owner's responsiveness during the initial leasing phase as a signal of the type of service they will receive if they sign a lease.

For a distressed property, responsiveness is even more critical. A leasing agent who has overcome all the negative perceptions and convinced a tenant to ask for a proposal or lease should never allow time for those negative thoughts to resurface. Rest assured the competition will be more than willing to remind those tenants of the property's past problems.

Being responsive is also critical to rebuilding credibility within the brokerage community. Brokers see responsiveness as a sign of professionalism and willingness to make a deal.

Improving responsiveness is simply a matter of planning and of follow through. For example:

* Turn around all proposals, leases, floor plans, counteroffers, or lease signatures within 24 hours.

* If something beyond your control causes delays, call the broker or tenant to explain why and tell him or her when the information or documents will arrive.

* Make sure the owner will support efforts to be responsive. Decisions must be made quickly. It is wise to eliminate as many layers of decision-making as possible. When sending documents out of town for approvals, express them overnight to avoid costly delays.

* Make it easy for people to get in touch with you. Return phone calls. Some agents find a team approach helpful, but only if all team members work interchangeably and are able to step into a negotiation at any stage should the lead broker be unavailable.

Step 6: Get the first lease signed quickly

Momentum can be a marketing team's best friend or its worst enemy. In the case of a distressed property, leasing agents usually come into the game behind the eight ball and spend their first weeks simply trying to slow it down and keep it from running over them. Their job, obviously, is somehow to turn it around and send it rolling the other way.

The best way to turn the tide for a distressed office property is to get a new tenant into the building as quickly and as simply as possible. If it means offering a lower rate or giving away a little more than the marketing plan originally called for, do it. Rates can always be raised later.

In addition, target strong tenants who are already actively looking for space. Keep in mind that their lead times may be as short as 45 days or, for larger tenants, up to a year or longer. Obviously, the marketing team with the most complete data about tenant plans, procedures, and lease expirations has an advantage in identifying the best prospects for a quick lease.

It is also important to avoid "negotiating the deal to death.' When owners are trying to build a reputation for being easy to deal with, they must avoid the temptation to try and better the terms at closing.

One owner learned this rule the hard way. Almost immediately after taking over leasing of the owner's distressed building, the marketing team brought the owner a tenant that would have taken one-third of the property's vacancy. The owner thought it was great, but he also assumed, incorrectly, that tenants must now be beating down his door.

The owner tried to improve the deal at the end of the negotiations, and the tenant went to another building. It was many weeks before the team was able to bring another tenant to the table.

The lesson is clear. Do whatever is needed to get that first deal and establish positive momentum. It is always much easier for the next tenant to decide to lease in the building if someone else has done it first.

In addition, signing a quick lease with as few complications as possible is the best way for a marketing team and owner to prove they will make good on their promises to be responsible and make deals.

A new tenant may also help convince existing tenants to stay. A quick lease puts more cars in the parking lot and more people in the building, making the building look more active and easing concerns about security. And think about how attractive a new tenant located right off the lobby would be for showings.

Step 7: Engineer the risk out of the deal

Despite the pressure to lease a distressed office property as quickly as possible, it is also important to be cautious when negotiating concessions, even in a soft market. Before offering a lease to any tenant, carefully review the company's financial statements and growth expectations. It is also wise to review recent trade literature to get some idea of how stable the tenant's industry is in a given market and how likely the tenant is to be affected by market reverberations.

Certainly, if the tenant is a strong, secure, and growing entity in a relatively stable market, the building owner may be justified in accepting whatever concessions are necessary to get the tenant into the building. This is particularly true if the tenant's name carries some weight in the market and, therefore, would help the building's image.

However, if the future prospects for a tenant are less certain, the owner and leasing agents should guard against the risk involved in such front-end concessions as free rent. Offer a reduced effective net rental rate, instead. That way if a tenant should go out of business or vacate during the lease term, at least the owner will have been collecting some rent from the beginning of the lease term.

With a questionable tenant and a front-end loaded lease full of free rent, there is always a danger the tenant could vacate before the end of the free-rent period, leaving the owner with nothing.

Step 8: Analyze successes and failures

Sometimes a marketing team's best efforts fail. Perhaps some vital information was miscommunicated, or there is a lingering image problem. Maybe a new player entered the marketplace. The market targeted could be incorrect. Or staff changes or a bad profitability report within the tenant's organization could sour a negotiation.

Whatever the reason, the former "hot prospect" does not sign the lease.

Marketing plans must include regular analysis of how well they are working and leave room for adjustment. Otherwise, leasing agents are simply going through the motions.

Marketing teams and owners must determine why they did not get a lease signed and whether these are. things that can be changed. If they see a negative pattern emerging, they their plans or techniques. They must also continue to stay attuned to market leasing activity and market changes to ensure the property stays competitive.

Step 9: From distress to success owners and managers of distressed office properties across the country would love to have a magic formula for turning their occupancies and their returns around overnight. The most successful marketing and leasing agents know, however, there is no magic to it. It simply takes hard work and realistic expectations about what rents are truly achievable.

If there is any formula at all, it would have to be:

* Make the property competitive.

* Tell the market it is competitive.

* Prove the property is competitive.

* Keep the property competitive.

And along the way, make it a point to work quickly and to be sincere, responsive, and professional in all dealings with brokers, prospects, and existing tenants.

Robert A. Fransen, CPM[R] is vice president and regional manager of Griff in Property Management Company. He has been involved in property management for 17 years and has been with Griff in for the past 15 years. Griffin Property Management, a division of The Griffin Companies, Inc. of Minneapolis, provides property management and real estate services for residential, commercial, and retail properties located throughout the United States.
COPYRIGHT 1990 National Association of Realtors
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Fransen, Robert A.
Publication:Journal of Property Management
Date:Nov 1, 1990
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