Feature Stories - September 2008

Industry Focus: Property Management

Just a few weeks ago, a group of Nevada’s top property management executives gathered at Cili Restaurant in Las Vegas to discuss the challenges facing their industry, from tenant retention woes, to recruitment efforts, to the dramatic increase in copper theft and graffiti. Connie Brennan, publisher of Nevada Business Journal, served as moderator for NBJ’s monthly event that brings industry leaders together to discuss issues pertinent to their professions. Following is a condensed version of the roundtable discussion.

Tenant Retention and Incentives

Tenant retention is the single largest challenge in the industry. The participants discussed new and creative incentives property management companies are resorting to during this economy as well as the increased trend in short term leases.

Galit Rozen: There is a lot of competition in the marketplace. We are practically giving away spaces right now just to get the tenant in, especially in the second generation office. I am actually trying to lower the rent rather than give away concessions. Some people like to see their rent low every month and some people want the first month or two to be free. You adapt to the tenant.

Frank Gatski: We are doing something new that we've never done before, we are working with tenants that are delinquent in their rents. We used to have a pretty strong policy that you get past 30 days and you're done. We're spending a lot more time with our tenants to see what we can do to help them by maybe offering them some rent abatement, adding it to the back end of their lease. I think a lot of it is, too, how large they are and how big of a tenant they are in your space. Because the last thing you want is another vacancy.

Marge Landry: One landlord may agree to wait the 30 days, the 60 days, or the 90 days. What I try to do is get all of my landlords on the same page. What I am seeing is that they are letting that 30 days pass. We are getting into the 60 days. The question now becomes, will we take small payments over a longer period of time as opposed to having a vacancy? And the other thing that my landlords are doing, at our recommendation, when an existing tenant is renewing, hold the rent for the first year of the renewal, to not automatically increase it even though the lease stipulates that it would be increased. And the reason that we are recommending that is because some of the properties that we have, if they substantially lower the rent, then it's going to affect the overall value of the building.

Gatski: We are also seeing a lot more demand for shorter term leases.

Landry: We have a lot of tenants coming in that request shorter leases too, especially ones that are downsizing, and they don't know if they're going to be able to continue at all and know that they couldn't stay in the space they were previously occupying.

Profit Struggles

With the financial pushback from owners to property managers being felt throughout the industry, the executives discussed the struggle in maintaining a level of profitability.

Renee Carroll: One of the things that we have been trying to do for our owners, to help make their buildings more marketable, is watching account expenses so the tenants' gross rent that comes out of their pocket, more of it can go into the owner's pocket as opposed to maintaining their property. We have to maintain the Common Area Maintenance costs (CAM), and these include the costs it takes to manage and maintain the property, items such as landscaping, utilities, janitorial costs and the basic repairs and maintenance.

Gatski: As a property management company your revenues come from a percentage of the rents. In this economy though, my revenues in leasing commissions and management fees are probably where I was at maybe three years ago.

Site Management Increases

Owners are increasingly bringing property management in-house and it has changed the nature of the business. The discussion turned to how the economic slowdown has forced property managers to change the way they conduct their businesses.

Landry: I am noticing that more and more owners are bringing property management in-house these days.

Gatski: I think some of the ones that are capable are taking property management in-house, but most of the out-of-state people that I have, have not gone down that road.

Rozen: They are getting creative now. I've seen situations where instead of having to manage a hundred percent of the expenses, income, deposits and maintenance, they are handling the money end. In turn they are asking us to just handle the maintenance end because they're out-of-state. So we've had to change our guidelines, as well.

Stacy Altergott: You have different levels of service where you have people who pay all the bills and collect all of the rent and do all of that. And then there are instances where we just basically do property inspection. If something needs to be fixed, we just do the phone call to the owner and give advice. Obviously there is a lesser fee charged for that nature of service.

Rozen: It seems to be a new trend.

Landry: You make the bulk of your money from lease renewals, new leases, selling a building and buying a building for an existing client. Right now, no one’s moving, no one’s leasing, no one's buying, because financing is so tight that means none of my clients are selling. So I based my 2008 budget strictly on my property management fees to see whether or not we could still be profitable. We are, but we are working twice as hard for half the profit.

Finding Talent

The ability to find talented people with the appropriate experience is felt acutely in property management firms. The executives discussed the supposed ‘buyers market’ for employers, the skill sets they seek and looking out-of-market for talent.

Gatski: The problem is there are thousands of residential agents out there that have a Nevada real estate license and want to be a commercial property manager. What I'm looking for is a property manager with five years experience in commercial real estate business and commercial property management. They are few and far between. I've hired several agencies. I've run ads on every possible Web site you can think of to try to find somebody.

Carroll: The challenge is finding enough people who have facilities management experience in addition to the accounting background and an understanding of that side of the business.

Altergott: It's even hard if you go with someone who’s been a residential manager. They just think it is so simple but it’s not the same at all.

Gatski: I’m finding the experience I need out-of-market and you have to have experience. If you are trying to find someone to step into a full-fledged property management position, they’ve got to have the experience so you can trust them to take care of the client, serve the client, and rely on their experience to solve problems.

Landry: I know when I was looking for another property manager I was not getting the local response that I was looking for. I was getting a lot of résumés from out-of-state. The concern for me was, is the person actually going to move here? But I think that we created the problem of finding local people because between 2004 and 2006, the market here for leasing and brokerage was so phenomenal. The frightening thing about recruitment is the huge financial liability placed on us. There is a glut of folks out there who are not surviving in their current jobs, so they want to come work as property managers but as much as we need good help we don't want to take that responsibility [of hiring someone without experience] because at the end of the day, especially if you’re the broker in the office, and something goes wrong with your new hire and I lose my broker's license over it, there goes the company.

Graffiti

The escalating problem of graffiti continues to plague monthly budgeting. New products and increased security were discussed, but the high cost of these activities often means they are not realistic options for property managers.

Carroll: I've been here for five years and graffiti has always been an issue. It's hard to budget something like graffiti because one month goes by and you have your engineer out there everyday taking care of it and then another month will go by and the taggers went to another property. There are things you can do to deter graffiti, like increase security, but everything that you can do costs money and increases your payment.

Rozen: I think it's gotten worse. I have certain properties where I just can't keep up with the graffiti. Nor can I afford to have constant security.

Gatski: There is a product called Block Out. It's clear and it sprays on any surface and what it does is, once someone hits the wall with graffiti, you're able to wash it off rather than having to repaint and repaint. The problem is it is expensive and so it kills your budget.

Copper theft

The participants were eager to discuss the dramatic rise in copper theft and how it has affected their bottom line. The property managers went so far as to share their individual strategies in combating the thefts.

Gatski: Copper theft is increasing a lot. Vacancy invites crime and there is a ton of vacancy right now. We are actually starting a policy. It's kind of a neighborhood watch policy within our own organization. Our property managers are informing our tenants of any scheduled work such as a roofer, an A/C guy, something that may not even involve their own suite or units. It's more work for us, but it's better than someone on your roof stealing all the copper in broad daylight because nobody knows that person is not supposed to be up there.

Carroll: It's very important to get Las Vegas Metropolitan Police Department involved with your properties. The squeaky wheel gets the oil.

Rozen: We had all the copper stolen from our one of our buildings and now at our vacant properties, we have security every night.

Gatski: And you have to look at it from the insurance standpoint. If your building gets hit again and again and I've had properties get hit multiple times. Your insurance carrier can look at you and go ‘maybe we will drop you or certainly we are going to look at increasing your premiums.’ And the only defense to that is you have to show them, as a property manager or as a property owner is what you've done to be proactive in preventing that from happening again. And it's difficult, it's extremely difficult.

Rozen: It's happening in occupied buildings in the middle of the day.

Landry: We have found that a neighborhood watch is wonderful, but money really causes people to react. We buy two or three little $25 Visa cards and then we send out a memo to all of the tenants and invite them to call us if they see any vandalism, any graffiti, any type of crime on the property. If they are the person that calls it in and leads to the arrest of that person, then they get one of those VISA gift cards. You would be surprised how much response we got.

Carroll: We have looked at combining some of the security costs with other management companies and doing some type of a shared contract for security. Another thing that we are going to be doing is reaching out to some of our competition. As much as we are competition, we still have relationships with each other.