Archives for January 2022

Sublease space in the first quarter of 2021 accounted for more than 30% of inventory in places like Manhattan, Toronto, and Austin, Texas, while, in San Francisco, it reached an astonishing 50.4%, according to a recent report by Cushman & Wakefield. Yet despite the glut, some brokers have succeeded.

Consider These Four Ideas:

1. Don’t overlook the obvious: other building occupants – Arthur Draznin, principal owner of Draznin Real Estate Advisors in New York City, emphasizes the importance of contacting every tenant in the building where the sublease space is located. “One never knows who may want to expand, and the best place for a tenant to expand is within its own building.”
2. Define characteristics of suitable prospects – Arlon Brown, SIOR, senior vice president of Parsons Commercial Group in Southborough, Mass., narrows the list of potential sublessees by defining criteria of likely candidates. For example, he recently marketed a sublease space in a Class B building in downtown Boston. In his analysis, the space was most suitable for a nonprofit. Accordingly, his team obtained a good list of nonprofits in metropolitan Boston and contacted the president or CFO of each. The process saved time and energy.
3. Offer special incentives – Bert Rosenblatt, cofounder of Vicus Partners in New York City, has observed more firms offering double commissions and $10,000 Amex gift cards. Charles Tatham, SIOR, CEO of Tatham Property Solutions in Paris, says his firm is paid out of the sitting tenant’s savings. Consequently, outside brokers don’t have to split their fee.
4. Use technology, but don’t neglect traditional outreach – Draznin advocates online video tours, virtual reality headsets that enable prospective tenants to experience walkthroughs, and 3D visual models. Nevertheless, he says there’s no substitute for bringing brokers on in-person tours. Another low-tech option is the plain old phone call. A personal call is a great way to direct a prospect’s attention to his opportunity.

Creative marketing strategies can generate results only when sublessors and building owners have realistic expectations. Brown has seen many would-be sublessors put their space on the market at only 10% or 15% below what they’re paying. “As time creeps on, they get down to a year left on a lease. That’s when they cut the price to a fire sale. But very few people want a sublease for only a year.” Brokers should counsel their clients to ensure such situations don’t arise.

Sublessees and their brokers should act quickly while the market still favors tenants. With supply decreasing but still high, sublessees can enjoy significant space upgrades.

Source: “Four Strategies for Subleasing“

The number of data centers developed, bought, and sold has exploded worldwide. Indeed, data centers have stepped into the spotlight as a prominent asset type.

Because of the similarities across asset types, a property manager experienced in other property types can successfully transition to managing data centers. No credentialing or degree requirements are needed, but a financial and mechanical background is extremely helpful.

What Are the Responsibilities?

Property management responsibilities include financial budgeting and asset management, electrical and HVAC maintenance, utilities and energy usage, environmental and regulatory requirements, life safety and security, and cleaning and janitorial operations. These areas demand close attention because neglect will result in an inefficient and costly operation.

Despite data centers’ similarities to other asset types, managing the centers is unique because it’s especially crucial to monitor and report utility usage and the amount of energy consumed on a timely basis. The centers have to comply with demanding environmental and regulatory requirements.

Data Centers Gobble Energy

Devices using the internet have been adopted at a tremendous rate, exponentially increasing worldwide energy use. Research reports have cited that data centers in the U.S. alone use more than 90 billion kilowatt-hours of electricity a year, requiring roughly 34 giant—500 megawatt—coal-powered plants to produce that electricity. Globally, data centers in 2020 used roughly 416 terawatts, equal to about 3% of the total electricity consumed worldwide last year.

Industry experts expect this energy consumption to double every four years, making it much more important for data centers to effectively use renewable energy sources such as wind energy and solar power.

Advances in renewables haven’t caused coal to disappear as an energy source. A data center property manager is positioned to reduce energy use and drive up efficiency, thereby reducing energy costs and the center’s carbon footprint.

Future of Data Centers

Virtually all companies use some form of technology, which means data centers are becoming an operational backbone of every industry. In addition, the workforce supporting and maintaining data centers is huge, including IT infrastructure professionals, software developers, IT security engineers, and server and cabling technicians. A traditional workforce also supports the centers: accountants, marketing professionals, brokers and leasing agents, engineers, and, of course, on-site facility managers. This bodes well for the future of data centers and the next generation of real estate professionals.

Source: “Big Growth Ahead for Data Centers“

Today’s Commercial Real Estate Deals Require a Strategic and Analytical Professional to Manage Risk and Create Value.

As the complexity of commercial real estate deals has increased, so too has the realization that a professional with an eye on local and macroeconomic trends is needed: an asset manager. This strategic thinker possesses the mindset and skill set to manage and mitigate risk, engineer cash flows, and collaborate closely with property managers to boost values of properties and portfolios.

Asset management professionals draw from a range of disciplines, including brokerage, property management, business, economics, finance, and accounting. In addition, they serve all sectors and levels, from sole proprietors to Wall Street portfolio managers. As a result, the asset manager role is shrouded in an unnecessary layer of confusion.

Blurred Lines

“The work of an asset manager is not new,” says Blaze L. Cambruzzi, partner at Pennsylvania-based True Commercial Real Estate, “but the concept of a professional doing it may be what’s new.”

The asset management role has its roots in 1980s tax reform and post 9/11, when low interest rates pushed fixed-income investment into mortgage-backed securities, says Cambruzzi. A self-described “data analytics personality” and real estate professional with commercial brokerage and acquisitions experience, Cambruzzi left his position when the 2008–09 financial crisis hit, earning a master’s degree in real estate financing and focusing on where the industry was headed. Paradoxically, he observes, many real estate master’s programs are under the school of architecture despite a major industry pivot: the placement of capital directly for investment not from real estate developers and construction firms but from Wall Street equity and debt. “You need a different model and approach – above and beyond the property manager — to sustain that,” says Cambruzzi, who also holds a master’s in business administration, “and that is at the asset management level.”

An asset manager brings a level of engagement to a property that exceeds what one would consider typical for a property manager collecting rents, paying the bills, and administering leases. For example, a property manager might see a tenant and property coming up for renewal and simply sign the tenant to another five-year term. “As an asset manager, I have to look at a loan coming due in 2023–24. If I take this five-year lease, that term will come due six months after my refinance, so when I go for refinancing, I might not get the best rate. Also, I have a bump scheduled for a year after I refinance. If I can move that bump up a year, that’s when the appraisal will happen and the bank determines the building’s value, and that’s to our benefit.”

From Renee Savage’s vantage point, the asset manager is the analytical problem solver. Savage, CPM, CCIM, is secretary treasurer for the Institute of Real Estate Management and president of San Diego–based Casavida, a property management company with a portfolio of boutique residential properties. A property manager looks at the one- to three-year time frame on a property, she says, while the asset manager is looking at five-plus years. “It’s a different lens,” acknowledges Savage. While she delineates the roles, Savage does not discount the property manager role, “because the property manager can make or break the asset manager’s success, and part of that asset manager’s role is to explain the long game.”

Savage describes herself as “more on the operational asset manager side, that step above the property manager.” She analyzes capital improvement projects—will they create value or maintain the asset at its current value?—and ensures that rental rates are properly set and the property manager is controlling expenses.

An industry trend is causing an overlapping of roles, Savage says. “You’ll hear a property manager tell an owner, ‘If I spend $20,000 at turnover on an apartment unit, I can get X many more dollars in rent and your payback comes in under X years.’ That is asset manager thinking, and property managers who’ve been in the business a long time are picking up that train of thought, so we are seeing blurred lines.”

When Cambruzzi launched True Commercial Real Estate four years ago, the company operationally split asset management from property management. “Our [asset management] contracts are with property owners and investors,” he says. Still, he recognizes that most clients in secondary and tertiary markets will not bring on an asset manager in addition to their property manager. “In reality, it ends up being a function of your property management service, so you might charge a premium to do asset management.”

John Viggers, CPM, CRE, entered real estate after his early years running a small-town bank and being a stockbroker, an experience that gave him deeper financial perspective. When the 2008 financial crisis hit, Viggers was elevated to president of asset management for NAI Global and won contracts with three national banks to manage their distressed properties. In that role, he and his teams established local brokerage and property management to stabilize and prepare assets—shopping centers, office, and multifamily properties—for disposition.

Viggers, who is currently senior vice president, Cushman & Wakefield Iowa Commercial Advisors, West Des Moines, Iowa, notes, “Roles and distinctions between property management and asset management are being blurred as managers are being tasked with so many roles and duties due to the growing complexity of our industry and deal making.”

“Quality asset managers need to think strategically and look, breathe, and act like an owner. They need to have that CEO mindset, because, ultimately, they are the boss of that asset,” Viggers says. “They report to an investor or a board of directors, but they need the mindset that ‘I’m responsible for a bunch of businesses that happen to be commercial properties and my job is to be the CEO.’”

On the higher echelons of asset management, Tina Renee McCall, CCIM, managing director at Bridge Investment Group, oversees the public company’s asset management team and office strategy. “The Bridge Office team has financed, acquired, leased, or managed 275 properties across the U.S., completing approximately $3 billion of transactions,” she says. “We currently manage 13.4 million square feet of commercial office.”

The asset manager term is used universally, she notes, but “I would separate it further: debt asset management and equity asset management; my team members are equity asset managers. I use the term asset management and investment manager synonymously.”

An economics and appraisal background launched her real estate career, and in this strategic role, she spends a significant amount of time talking to and collaborating with tenants, brokers, and property managers; scanning information and data to understand the drivers of local and macroeconomic trends, such as inflation and supply chain issues, for potential impact at the local level; and creating property-specific business plans. Simply put, McCall says, what an asset manager does is find and create value for the building and investors. For instance, when Bridge Investment Group purchases underamenitized and underpopulated buildings in high-growth markets, McCall and her team renovate, add amenities, and build spec suites and white boxes. “Then, we will hire the best leasing team in that market and drive those occupancy and rental rates, creating value for the asset. We are seeing good returns and success across the United States. The average hold is three to seven years, and it’s fun to see what you can do in that time.”

On the other end of the asset management spectrum, Michael Hironimus, CCIM, is managing assets for individual real estate investors. He began his career in private investment, followed by 10 years with Kidder Mathews on an industrial-retail team, before becoming sole proprietor of Duckridge Realty Advisors, West Linn, Ore.

“I noticed there was a need for private asset management. Many investors don’t have the time, expertise, or wherewithal to invest properly into commercial real estate, so I saw a niche: high-net-worth clients and family institutions.” These clients run the gamut from a client with a single $3 million property to another with nine properties worth $80 million–$85 million. Hironimus’ services include driving rental growth; sourcing and analyzing debt; procuring financing; assisting with back-end tax strategies, accelerated appreciation, and cost segregation; and mitigating risks. He looks at what the investors are trying to accomplish—cash flow, legacy portfolio—because that drives the risk profile. “Then, we formulate goals. We focus on risk management and making clients aware of future risks and pitfalls.”

When he was hired to recruit a new leasing team he was paid hourly on retainer, but compensation for asset management or portfolio management typically is based on a percentage of net operating income. The rationale: “Property managers usually take a percentage of gross operating income, but we’re focused on the income and expenses – trying to optimize and streamline the expenses. That fee structure aligns our interests with those of our investors.”

Hironimus sometimes plays the role of teacher or psychologist, helping a complacent investor—for example, someone who isn’t collecting the correct market rents or who is deferring improvements—to get back on track. He recently saved a client several hundred thousand dollars in one year. “The idea with asset management is you take clients who are more passive and replace it with active management. That’s what real estate needs.”

Property management remains critical to the profitable functioning of buildings. But as the business grows in complexity, the need for active financial management will solidify the role of and demand for asset managers.

Source: “Complexity Drives Growth of Asset Management“