By Gary Tasman
Just six months into the year, 2022 has proven to be a challenging year economically. High inflation, a volatile stock market, a tight labor market and growing interest rates have all created havoc for investors. Commercial real estate, long considered a safe haven in inflationary times, has remained popular among investors– and with proper care and attention can still provide considerable yields for property owners.
When commercial property sales topped $600 billion in the U.S. in 2019, it marked the busiest year ever in the sector. And while COVID-19 cooled the commercial real estate market the following year, the downward trend didn’t last long. In 2021, sales topped $809 billion, according to data from Real Capital Analytics– a whopping 35% over the previous high. Although we expect the market to normalize in coming months, we can still anticipate another strong year in 2022.
Data from Cushman & Wakefield explains one reason why real estate has long been considered a hedge against inflation. For each 1% increase in inflation, total returns on property average 1.1%. “In other words,” explains David Bitner, Global Head of Capital Markets Insights, “commercial real estate not only protects against higher inflation but provides outsize returns specifically in these environments.”
With all investment comes risk, and commercial property is no exception despite its traditional returns. As with most investments, one way to mitigate potential jeopardy is to closely monitor current business trends and economic conditions and properly manage that asset in response.
For many commercial property owners, that task can be overwhelming. Just day-to-day property management tasks can quickly become a full-time job, leaving little time for the added responsibility of managing that same property as an investment asset. But these property owners have a secret weapon at their disposal: professional property managers.
What do Property Managers Do?
Most people’s perceptions of property managers come from personal experience as tenants, either in a residential or commercial setting. As a renter, your property manager is the person you pay once a month and on whom you depend when you need repairs. While accounts receivable and plumbing maintenance are important responsibilities, commercial property managers present many more benefits to busy owners and investors, especially in economic times like these.
Manage Multiple Properties
The recent property boom has allowed many investors to broadly expand their commercial real estate holdings. While economies of scale allow owners to take on more properties without a proportionate increase in some expenses, other factors can manipulate this equation. When an investor holds multiple properties, they are often widely dispersed geographically, making it difficult to respond to on-site issues in a timely manner.
No matter the nature of these issues, a professional property management company has resources dedicated to efficiently deploy staff to manage those affairs.
CAM Calculations
Economic conditions like supply chain issues, labor shortages, and high inflation have raised expenses for property owners, and despite attempts by the Federal Reserve to quell the cost of living, inflation is still surging. In the Southern U.S., the 12-month consumer price index advanced 9.2% in May, the highest level our region has seen yet.
For property owners, these rising costs can produce challenges to area maintenance (CAM) budgets. Typically, CAM fees are calculated at the start of the fiscal year and reconciled at the end of the year. If CAM fees are initially set too low, unforeseen expenses and rising costs can leave owners in the red for months until reconciliation, and tenants who are hit with high increases may be driven to vacate. A professional property manager has the knowledge and expertise to better anticipate expenses for the year and set appropriate CAM fees.
Lease Negotiations and Terms
During the height of the pandemic, commercial tenants were reluctant to sign long term leases, but that trend appears to be changing. Nationwide in Q4 2021, nearly one-third of all commercial leases were for a term of 10 years or longer. That same quarter, the average commercial lease was 57.8 months, compared to a low of 51.2 months in Q3 2020.
Longer leases can be beneficial for property owners because of a reduced risk of vacancy, but can also be risky given the volatility of the current economy. A property management company has expertise in designing and negotiating leases to mitigate risk for owners, for example by preparing a document that includes automatic increases triggered by the cost of living index or other economic variables.
Ensuring Full Units
Our region is experiencing historically low vacancy rates in commercial property. Our Q1 2022 MarketBeats reports show a vacancy rate of 4.4% in the general office market and a stunningly low 1.7% in industrial properties. As the market normalizes, vacancies will eventually increase.
Some level of tenant turnover is natural and expected, but lengthy vacancies can quickly become a financial drain on commercial investors, especially those not equipped to market their assets to new tenants. Property managers can keep your portfolio of properties full by marketing your assets, vetting applicants, and onboarding new lessors efficiently.
Maintenance and Beyond
The more properties you own, the more difficult it becomes to handle the maintenance and repair needs of those assets. The current labor shortage has made it difficult to find contractors, maintenance workers, and other vendors, and new or part-time property owners may not have the resources needed to find and enlist these tradespersons on short notice. A property management agency will already have established relationships with these vendors and some, like Cushman & Wakefield | Commercial Property Southwest Florida, employ their own facilities services team to efficiently handle issues.
As the commercial real estate market normalizes and vacancies increase, it will become more difficult for property investors to keep their units full. To mitigate this trend, it is imperative for owners to have a well-maintained, financially stable asset. Professional property managers are better positioned than owners to ensure an asset is in good condition, both physically and fiscally.
If you’re new to property ownership– or if you have recently expanded your portfolio of commercial properties, you will likely benefit from hiring a full-service property management team. The experts at Cushman & Wakefield | Commercial Property Southwest Florida have the knowledge and experience in property management and facilities services to keep your asset running efficiently and profitably. To learn more, call us at 239-489-3600 or contact-us.