Better Days For Property Managers

May 4, 2007
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GRAND RAPIDS — For at least the last three years, property managers and commercial space landlords have been fighting to keep their heads above water — especially those who are immersed in the office market.

But the tide is beginning to turn slightly, and better days may be just over the horizon.

"Now that we are seeing a recovery mode starting to occur, the future is very bright. There is a lot of opportunity out there, there really is," said Betsy Slane, vice president and director of property management for Grubb & Ellis|Paramount Commerce.

Charlie Hoats, a property manager with G&E|PC, said, "I agree with that. I just saw something today that says 21 of 50 major markets in the country have shown a decrease in the vacancy factor and have also shown an increase in asking rents for the first quarter. That's obviously a good sign."

Too much available space has been the single-largest issue with which managers have had to wrestle. Having a higher vacancy rate — say, 15 percent or more — typically results in a tenants' market that forces landlords to keep rental rates low just to remain competitive, and drives them to offer incentives or giveaways such as months of free rent.

But Slane said she sees an emerging trend: Base rents are beginning to slide up in the office market, something that generally hasn't happened since 2004.

"For the first time in three years, I think there will be some positive attrition in base rates, particularly in the office market," she said.

Slane said the past few years have been tougher for office managers than for managers of retail properties, as the retail market has remained relatively strong — at least as far as base rents and tenant incentives are concerned. But if a property wasn't in the right place at the right time, retail landlords could have faced the same issues as their office counterparts.

"With the retail, it's all about location. The newer shopping centers and the newer developments that are getting a lot of attention are where the clients want to be. They want to be in the hot markets, the hot corridors, and some of the older shopping centers are seeing some fallout from that," said Slane.

"But, overall, I think the retail market is still relatively strong. It's dependent upon location. But retail has not seen the same factors that the office owners have had to deal with."

Hoats said rising operating costs are another factor that has plagued office landlords. When everyday costs like utilities go up, the value of a property can go down.

Slane said now that the market is starting to rebound, it's vital that managers keep those costs manageable to maintain a property's value. And that was pretty difficult to do during the cold spells in February and March when the cost to heat common areas rose by double digits as the temperatures fell into single digits.

Those months were even costlier for office landlords with gross leases, which require them to foot the bill for heating offices along with common areas. In retail, managers only heat the common areas while tenants pay to keep shops warm.

But both office and retail landlords have felt the heat of higher utility bills for much longer than just the past few months.

"Utility costs have skyrocketed in the last two seasons. Our natural gas prices on our management properties have sustained, I want to say, 35-percent increases, and that is something we can't control," said Slane.

But as Slane pointed out, higher fuel costs have strained more than the heating budget the past two winters. Retail and office managers have seen costlier bills coming from almost every service provider; gasoline prices, for example, have been hovering near the $3-a-gallon mark for quite some time.

"When you're talking about trash pickup on 100 buildings on a daily basis, when you're working with a trash company, that's a lot of fuel. Any fluctuation in the fuel cost reflects pricing," she said.

"That trickles down to pretty much everything that comes to your property, too, whether it's the trash hauler, the landscaper, the delivery of common-area maintenance supplies and things like that. All those providers are showing a little bit of an uptick in their costs because of fuel costs," said Hoats.

One solution? Slane said her firm has had good success with managing those rising costs by requiring providers to bid on jobs.

"We have a list of preferred service providers who are very good to us," she said. "But it's a struggle."     

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