Increasing vacancy rates and foreclosures add to property management challenges

September 28, 2009
| By Pete Daly |
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While vacancy rates are up from one year ago and more banks continue to take control of properties as foreclosures on business real estate continues, the professionals at some of West Michigan's largest property management companies are focused on new opportunities and on the economic improvement they see on the horizon.

Industrial real estate is not currently losing much ground, unlike retail space, based on vacancy rate changes seen by Elizabeth A. Slane, vice president/director of property management at Grubb & Ellis|Paramount Commerce in Grand Rapids.

Slane said the vacancy rate for West Michigan industrial properties in the second quarter was 8.7 percent, compared to 8.2 percent at the same point in 2008.

The office vacancy rate increased slightly, from 17.7 percent to 18.7 percent.

Retail space showed the most dramatic change: an increase from a 7.4 percent vacancy rate in 2nd quarter 2008 to 12.4 percent in the second quarter this year.

"We're seeing more distress on the retail side than other sectors," said Slane. GE|PC's retail portfolio is mostly smaller neighborhood shopping centers, as opposed to enclosed malls or big box stores, she said.

The biggest change in commercial property management now, in Slane's opinion, "is probably the bank involvement … and also collections, particularly on the retail side."

"I think the banks are still gun shy, and that has caused some consternation for some of our clients" whose loans need to be refinanced, she said.

"The banks are starting to take back properties, so we're doing more (management) work for the banks," said Slane.

She said the bank control of properties “was happening a year ago. It's really just hit our portfolio this year."

GE|PC may be the largest property management firm in West Michigan. Two years ago, the company had 2.4 million square feet of real estate under management; today it is at 4.6 million.

The 12-person staff at GE|PC can provide most of the functions that are part of property management: facility management including maintenance, plus accounting and insurance, construction management and lease administration.

More than a third of the square footage managed by GE|PC is comprised of eight large industrial plants, which falls under its facilities management scope. Slane said facilities management is essentially "the care and feeding of the physical plant," which includes maintenance of the structure and grounds, snow removal, landscape irrigation and more.

Tom Wiarda, director of property management at The Wisinski Group, said that cost-cutting is the big issue he is seeing now in property management, and it is tied to vacancy rates.

"Just from personal experience, I know (the vacancy rate) is certainly up," said Wiarda. Wisinski has about 50 properties in West Michigan, almost equally divided into retail, office and warehouse, plus some residential. Its square footage has remained the same from 2007 through 2008: about 2 million square feet.

"Owners want to cut costs to keep operating expenses low," said Wiarda. With vacancies up, cash flow is tighter at many properties, meaning the owners are tightening their belts. But tenants with triple net leases are also trying to keep their operating expenses as low as possible, because they're paying a share of those recurring costs, too.

How does Wisinski try to cut costs in property management?

"We work through various contractors to re-bid services such as trash pickup, snowplowing, insurance," said Wiarda. In cases where property taxes are one of the biggest expenses associated with the property, the firm pursues property tax appeals, he said.

NAI West Michigan is also seeing some increases in its property management work due to real estate occupied by failing businesses changing hands in the stressed economy.

"We are seeing more of it in the commercial lending," said Dave Smies, a partner at NAI West Michigan. "We are seeing quite a bit of people who are not able to carry their building or buildings any longer. Then whoever owns the mortgage is forced to take it and sell it — and then we come in and manage it."

Sometimes the management contracts that NAI West Michigan receives are sudden and short term but then turn into long term, said Smies.

He said the types of properties changing hands due to the recession are "across the board: office, retail, industrial … the whole gamut."

In some cases, land that was being sold on land contract is going back to the owner, he said.

"I see some great clients who are growing and are buying up real estate for their use. Then there is a whole other group. … Their business continues to just stay the same and not grow, and some are falling off," he said.

Smies said the brokerage side of NAI West Michigan's business is "blessed," adding that industrial is the strongest.

"We are growing; we are profitable," Smies said of NAI West Michigan in general. The business employs more than 30 people in its property management and brokerage functions, and although it is independently owned and operated, NAI West Michigan is affiliated with NAI Global, which is active in 40 countries and has 5,000 employees worldwide.

Foreign markets are becoming a part of NAI West Michigan's business, and there is a lot of opportunity there, according to Smies.

"We have clients locally who are now asking us through NAI Global to do business around the world, which has actually been a great thing for us," said Smies.

His staff fielded an inquiry recently from a West Michigan client interested in occupying a $20 million office building in India, "which our client here totally loved. So it's a bigger deal than an office downtown."

Last year Smies was in Moscow, where NAI Global has an affiliate office. The American clients looking for real estate there were in education, according to Smies.

He said when meeting with clients, he always inquires about their "bigger picture," which may involve potential activities abroad.

"You would be blown away at the amount of opportunities there is," he said, but many people shy away from considering the overseas real estate market because of the travel involved.

Cutting costs is an issue at Investment Property Management, part of The Granger Group based in Wyoming. IPM manages almost 2 million square feet of property that is located in Lansing, Kalamazoo, Battle Creek, Grand Rapids, Holland and Zeeland. Sixty to 70 percent of it is owned by The Granger Group, according to Gary Granger, owner of the company.

Manager Sarah Tyler said the challenge IPM faces in property management right now is a continuing need to cut its operating expenses while still providing the level of service its tenants have come to expect. The other challenge is retaining current tenants because of other leasing opportunities available to them on the market.

"We have a fair amount of retail holdings," said Granger. "A little bit of our concern there is what do we do to help our tenants through the economy. Everybody is facing the same economy."

A lot of the real estate available for lease is financed on variable debt, he said, and "the cost of money is a lot higher today … and the need for more equity is a lot higher."

"We're cautiously optimistic about what the opportunity is right now," said Granger. "Having said that, this is Michigan."

The property managers contacted by the Business Journal said they believe overall that the business real estate situation will be stronger soon, as economic factors shake out the weaker players. But for now, at least, the going is tough.

"They're challenging times," said Slane of GE|PC, adding, "There's a positive that will come from this. There is stabilization happening in the market. We're seeing business increase."

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