The Business of Commercial Real Estate Management

In the post-pandemic era, the survival of commercial real estate and its management is tested as never before. Between oversupply, as many workers continue to work from home or spend fewer days in the office and an aging infrastructure of buildings that need repair, commercial real estate is in trouble, leading some economists to worry over the potential for defaults and bankruptcies to strain financial institutions and cause another recession. These woes, in turn, put pressure on businesses engaged heavily in commercial real estate management to run more efficiently to avoid suffering the same fate. That’s our topic for today, as many of these companies fail to invest in the proper processes that enable them to maintain property portfolio margins long-term.

The purpose of this post is to explain some of the commercial real estate practices that can significantly improve your bottom line and ultimately boost your income if you are in this industry.

commercial real estate woes
Image courtesy of The Economist

Managing commercial real estate effectively

Managing commercial real estate the way you’ve always done it is a recipe for disaster in today’s markets where about a billion square feet of office space remains empty in the US alone, that’s nearly 20% of all commercial space available. Much of this space is high-end Class A office space like that shown above, which isn’t really suitable for other purposes without wasting the expensive rugs, lighting, electronics, and wall treatments.

These factors are putting enormous pressure on the firms managing commercial real estate to operate more efficiently and cut the fat. Here are some ways to set you on a path to success.

Conduct regular financial analysis

The first step if you already have an established portfolio is to improve your financial analysis. Checking existing income and expense reports can help you identify ways to trim expenses and can guide you toward making better short-term and long-term decisions.

If you aren’t using commercial real estate or CRE software yet, it’s never a bad time to start. These solutions let you see property-related metrics in one place and enhance your ability to manage various leases across locations. It gives you a sense of where the core of your business lies and where more opportunities might arise.

Network professionally

You can also improve commercial real estate management by networking more effectively. Building professional contacts enables you to learn more about the industry and the kind of strategies that are working for these firms.

Try networking with brokers, contractors, and other investors. Listen carefully to what they say and the seasoned information they provide. Take this into consideration when considering expanding your portfolio or when you make other significant decisions. Often the people on the ground know best what to do.

Diversify your portfolio

Another way to improve your portfolio management is to spread your risk. Setting up various commercial properties across sectors, industries, and geographies makes it less likely that a single shock will derail your enterprise.

Diversification takes many forms and depends on your risk tolerance and the risks you perceive as most likely. For example, you might invest in unconnected markets if you want to diversify to protect against economic downturns. Similarly, you might invest across sectors to defend against technological disruption. With a proper strategy, you can maintain long-term investments and guard against declines in profitability.

Change your lease structuring

You should also spend some time considering your lease structuring. Ideally, you want to adjust your leases to maximize your income. You can do this via several methods. One option is to simply lengthen the lease. This approach reduces void periods and enables you to make money more consistently over time instead of having to regularly advertise to find new tenants.

Another strategy is to include clauses in the lease that let you pass on various costs to tenants. For example, you might create rules that tenants are responsible for the maintenance of various building facilities. If you do this, you can charge a slightly lower price than your competitors, and you incentivize tenants to take care of the building. It is in their interest to do so, reducing ongoing maintenance costs.

Perform routine maintenance and upgrades

You should also look for maintenance and upgrade opportunities that increase the future rental value of the property and generate a positive ROI in the long run. While it’s tempting to postpone maintenance and repairs when you’re struggling financially, deferred maintenance and repairs are more costly in the long run and can lead to expensive lawsuits. It also gets increasingly difficult to retain tenants and replace them as your building infrastructure crumbles. Tenants are much more likely to pay a premium for a well-kept office than one that’s run down.

The extent of this premium is substantial in some markets, especially for high-end offices. Therefore, you need to ensure that the cost of upgrading and maintenance is less than the premium you can charge. Include the cost of deferred maintenance in those calculations. In most cases, the result of these calculations show it’s better to make improvements and keep your infrastructure in top shape over time.

Do market research and price competitively

Another popular tactic for improving real estate management as an entrepreneur is to do your market research and price competitively. Make sure you adjust your rates and leasing strategies to stay competitive, responding to trends elsewhere in your location and sector.

Leasing strategies tend to go through cycles. Flexible terms are more popular during economic uncertainty, while fixed rates tend to dominate in boom times.

How you do your market research is very much up to you. You can gather information via your network, employ specialist analysts, or do your own research. Remember, if you are at the top of a successful organization, it is highly likely that you are able to make better strategic decisions than the rank-and-file.

Seek ways to retain tenants

You should also invest significant energy in working out the best strategies to retain your tenants. As with any commercial endeavor, it’s five times more expensive to replace a customer than to keep one. Retaining tenants willing to pay you over the long term is essential for the overall financial health of your operations. If you can keep people long-term, it improves turnover and boosts the reputation of your property empire.

The best way to do this is to provide excellent customer service. Most tenants will pay a premium if they know they can rely on you to resolve issues, price fairly, and provide their employees with high-quality accommodations. Therefore, address maintenance issues quickly if they arise, and provide tenants with incentives to stick with you.

Manage properties professionally

commercial real estate
Photo by Alex Tai on Unsplash

You can also improve commercial property management by hiring professionals to do the administration for you, especially if you are an investor as opposed to an entrepreneur looking to make a business in the real estate sector. These firms have specialist knowledge that enables them to more efficiently provide your clients with services, reducing your administration burden significantly.

Professional property management often becomes necessary as the number of properties in your portfolio rises. You may be able to manage one or two by yourself, but when the numbers go above ten, getting extra people onboard becomes essential. Many real estate entrepreneurs get into trouble believing they need to manage strategy and daily operations, which isn’t the case.

Conclusion

Whether you rent out office buildings, warehouses, or retail units, improving commercial real estate management is a way to secure your long-term profitability and the viability of your business. Getting it right is challenging, but proper diligence and management practices are usually all you require for a thriving business. Take time to observe what successful competitors do and emulate them. Look for ways to reduce your costs while increasing the time tenants remain with you.

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