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Outsourcing management in a soft market.

During the past year and a half many corporate tenants have reduced their space use as well as postponed real estate decisions until the economic recovery takes hold. As vacancy rates have increased and leasing velocity has slowed, owners of commercial real estate have lowered rents to new and current tenants to maintain occupancy and attract space users to their buildings. The resulting pressure on cash flow has prompted many property owners to explore ways to reduce costs.

For an owner of a small portfolio, outsourcing the management of commercial real estate to a third-party property management firm can be a very effective way to reduce building operating costs. Sophisticated property management firms can offer those property owners greater buying power, leveraging relationships with utilities and other service providers, while also providing services that may be impractical or impossible for small property owners to provide themselves.

One example of the benefits provided by economies of scale can be found in energy costs, which have increased significantly in the past several years. A property management firm that oversees millions of SF of commercial real estate can buy fuel oil and electricity in bulk for all the properties it manages.

Rebidding fuel oil and electricity contracts in this manner can reduce energy costs for building owners from 5 to 15%. Tenants may also benefit since most often they pay for electricity and other utilities either directly or through lease passthroughs.

Insurance, and terrorism insurance in particular, has become a major issue in operating costs. A property management firm can reduce expenses for building owners by arranging for insurance, while keeping their clients' assets separate and whole.

However, the main issue for many building owners at this time is not saving money on insurance policies, but obtaining terrorism insurance coverage at all. A property management firm with a large portfolio of commercial properties under its belt has more clout to help owners secure insurance they might not otherwise obtain. Many property managers employ specialists that work with a network of insurance brokers to secure coverage for their portfolios.

Outsourcing rent collection and lease administration can also create savings. A large property management firm with a dedicated staff can provide those services much more efficiently and at a lower cost than a building owner that has to maintain a small staff of its own. This is yet another example of ways that outsourcing directly impacts a building owners' bottom line.

Another way a property manager can maximize income for building owners is through rooftop equipment management. Telecommunications companies are using rooftops for cellular phones, satellite transmissions and high-intensity transmissions. This is a very lucrative stream of income that requires no capital investment on the part of the property owner, nor does it reduce the rentable square footage within a building.

A sophisticated property management firm also will conduct frequent quality assurance tours that can significantly reduce operating costs. These tours entail ongoing audits of the physical plant and equipment that serve common areas and tenants' premises.

The audits can uncover anything from broken door hinges and ripped carpets to broken lighting fixtures and clogged filters.

These routine tours can result in lower operating costs by simply identifying repair issues before they become major expenses.

The audits also increase the frequency of personal contact with the tenants, which can often mean the difference between renewing a satisfied tenant when its lease expires or having to fill that space when a dissatisfied tenant chooses to relocate.. The tours demonstrate to a tenant that an owner cares.

In today's market, every company is looking to maintain or increase business, and this includes subcontractors that handle much of the construction work required to maintain commercial real estate. A large property management firm has relationships with quality subcontractors that perform work for the firm time and time again. These relationships translate into a better product at competitive prices, especially at a time when leasing is down and subcontractors are seeking more work.

Periods of economic stress create significant opportunities for owners of commercial real estate. They can use these times to streamline their operations and position themselves to maximize efficiency and profits for both soft and robust markets alike.
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Copyright 2002, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Cavanaugh, Richard J.
Publication:Real Estate Weekly
Geographic Code:1U2NY
Date:Nov 20, 2002
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