With an average vacancy rate of around 20 percent for commercial properties in Southern Nevada, commercial property managers say they must be ever more creative and tenacious in order to survive the recession that continues to pummel the state on a variety of fronts. Not only has Nevada had the country’s highest unemployment rate for a number of months, it now has the undesirable distinction of being the most stressed state in numbers of foreclosures, bankruptcies and joblessness, according to a recent Associated Press economic analysis.
The doom and gloom figures support what is already widely known and what commercial property managers struggle with on a daily basis. “The major difference now is that we are spending more time retaining tenants and working with our landlords to help negotiate lower rents,” explains Marge Landry, president and broker for Landry & Associates in Las Vegas. A veteran with around 17 years in the business, Frank Gatski, CEO of Las Vegas-based Gatski Commercial, says he’s never worked so hard to close deals. “We’re working harder than ever to help our property owners survive this economy,” he says. “You have to be creative and proactive.”
Vacancies vs. Rents
The inverse relationship between vacancy factors and rental rates has helped create a brutal playing field where budgets are extremely tight and every penny counts. “The high vacancy factors make budgets very difficult,” Gatski says. In such a highly competitive market, property managers say they need to work closely with tenants and landlords to tailor exactly the right deal that will be profitable for all concerned. Inking the contract typically requires trimming expenses and adding attractive amenities. “Property managers today are different. There’s a higher level of expertise needed. You have to find a way to add value to the property. You’re not babysitting,” Gatski says.
Because rents have plummeted and the profit margin is less, Barbara Barron, president of The Equity Group in Las Vegas, emphasizes that expectations have to change. “We’ve always paid attention to value, but now everybody has to come down,” she says. “We’re changing with the times, listening to everyone and finding a way to work with them. It’s challenging and it’s a new set of details.”
One of the most unwelcome changes has been average rents that are 30 to 50 percent less than just a few years ago. In addition, the traditional three- or five-year lease agreements are vehicles of the past, replaced by two-year contracts that allow for more flexibility. In such uncertain economic times, none of the parties involved are comfortable with a more lengthy commitment to a lease. “You do whatever you have to do to get the spaces full,” Landry explains.
In the best of times, the role of a commercial property manager has always consisted of performing a number of predictable jobs that keep the property running, such as collecting rents, paying vendors and supervising maintenance, for example. Far from boring, however, the repetitive activity can be rudely interrupted at any time by the unforeseen. “You have to expect the unexpected,” Barron says. “You have to be able to juggle 20 balls in the air at a time.” You also have to go above and beyond, considering the tough economic times. “I’ve been going out and physically collecting rents to keep the cash flow alive,” she says.
Commercial property managers, rather than landlords, are also the face of management to the tenants as they develop trusting relationships in their day-to-day dealings as well as in their long-range planning. Although leasing agents handle the specifics of the lease agreement, managers are usually involved in developing the basics because of their close proximity to the tenants. During good economic times, property management has typically been viewed as a challenging career that provides a nice steady income for those who have the appropriate qualifications.
During bad times, however, the challenges increase and the revenues decrease. With 1,700 tenants and more than seven million square feet in his portfolio, Gatski says that a lot of the problems are due to the high vacancy factor. “The largest percentage of our portfolio has financial problems,” he says. “I have buildings that are 100 percent vacant that have been taken back by the bank.”
Like albatrosses hanging around the neck, vacancies are the bane of property management. “It takes more time to manage a vacant building because you have to worry about vandalism,” Landry says. It’s not unusual to find that vandals have cut holes in walls to gain access to neighboring space where they can steal valuables, such as computers and other office equipment. Managers also need to check on vacant buildings at least weekly to make sure the utilities are still working and that the structure hasn’t been damaged. The biggest downside to vacancies, however, is their lack of revenue. “You collect nothing on a vacancy,” Landry says.
The Role of Lenders
Changes in lending policies in the past several years have dramatically impacted the commercial real estate market. Gone are the days of easy credit, replaced by practices that severely limit those who can qualify for loans. “Your credit has to be pristine,” Gatski says. The small amount of new construction that might be anticipated typically requires 40 to 50 percent down, a far cry from the interest only loans that were so popular just three or four years ago. “Previous lending practices were too loose, but the pendulum has swung the other way,” Barron explains. Commercial property managers say that banks need to be more realistic in developing lending policies that more accurately reflect the current economy. They feel frustrated in not being able to assist their clients in obtaining financing at a level they can afford. “I don’t see them (lenders) loosening up credit yet,” Gatski says.
Despite their continued tight credit policies, however, banks are being forced to be more pragmatic in moving the large number of foreclosures they’ve found themselves saddled with. The going rate for many types of commercial properties has dropped to around 30 cents on the dollar, according to Gatski. “You can’t build it for what it’s selling for now,” he says. Unfortunately, the number of foreclosures is expected to continue. “A lot of people bought commercial property between 2004 and 2006 with an interest only loan and a balloon payment in five years. Now they can’t make the balloon payment,” Landry says. “We heard that 2010 would be the year of foreclosures and it’s true. I’ve lost two accounts to foreclosures.”
As Gatski, Barron and Landry look to the future, they don’t expect dramatic changes in their roles as property managers to happen very soon. With the increased complexity that is now required they believe that landlords need professional management now more than they ever have. Although it’s tempting for property owners to consider self management in order to save money, it can be a very bad idea because they’re usually not suited or qualified for an additional job that can demand their attention all the time. It can also end up costing them more money than what they might have been paying a manager. Landry says she’s fortunate in having clients who aren’t local. “Local owners are more likely to try to manage their own property to save money,” she says. With clients as far away as Bangkok she says she feels more secure in their need to have a local presence.
Years of experience have equipped these three managers to ride out the bad times and continue to profit in spite of them. The recession has taken its toll on others, however, as they have folded their tents and gone on to other endeavors. “A few companies have gone out of business and even more agents have decided to pursue other professions,” Gatski says. Because of the challenges involved in management today, however, it’s not as easy as it once was to migrate from other areas of real estate into management and still be successful.
Although many economic solutions may be out of their hands, property managers have a lot of down-to-earth ideas about what needs to be done in the coming months and years. “We don’t need to develop any more new properties right now. We have so much inventory that needs to be absorbed before we continue to build,” Landry says. For those clients who’ve given up commercial space and are maybe working virtual from home, she says property managers need to find ways to make it affordable again to lease a business location. “We have to entice people out of their garages and back into commercial space,” she says. She also questions the wisdom of new taxes that are levied on small businesses. “Small businesses are the core of employment in the United States,” she explains. She fears that businesses won’t be able to absorb the increased nickel and diming.
In spite of bailouts and stimulus money from the federal level, Gatski questions the value of those programs. “I’ve yet to see any benefit to the small businessman,” he says. He suggests that tax benefits be given to employers who create jobs. He also sees a positive role for the Small Business Administration in helping to loosen credit for qualified small businesses. Although economic indicators are still negative in many ways, Gatski says he sees a light at the end of the tunnel with increased activity for his company. “We’ve signed 210 leases to date (end of August). That’s 20 percent more than all of last year,” he says. “The thing that’s been promising lately is that I’m seeing more incubator space, 1,000-square-foot units, that are starting to lease.”
Barron also sees a silver lining, saying that business at her company is up from last year and that she’s added another staff member. She believes that the area needs increased tourism, but that positive thinking can also work to increase consumer confidence. “Everybody needs to spread the word about the little victories in business,” she says. “I’d rather spread the good rumors.”