How Property Managers Can Make or Break Industrial Tenants’ Bottom Line
At the end of 2022, nearly 75 percent of 100 major industrial occupiers surveyed by CBRE cited occupancy cost as the top consideration when selecting an industrial site. While these occupiers continue to expand their footprints across the U.S., high occupancy costs have become a challenge in a tightening market, as highlighted in a report by Newmark from the end of 2022 stating that costs had increased by 42.2 percent over the past five years.
Given the increased demand for industrial space over the last decade nationwide and recent inflationary pressures, the widespread hike in these costs was not unexpected. It does, however, present a unique and seldom-seized opportunity for property managers to serve as a partner to tenants in helping them adjust their business strategies to withstand these increases while also keeping occupancy high across their own portfolios.
What tenants don’t realize is that having the right property managers is critical to navigating and even mitigating these challenges. How does that work, and how can tenants tell good managers from poor ones?
First, it is crucial for tenants to explore the reputation and organizational values of the landlord and property managers. Landlords who invest their own money into new construction projects or capital improvement and intend to hold properties for the long term typically align best with a proactive and creative property management team.
While there are only marginal differences in the building quality when comparing Class A assets, the management quality of these buildings can vary vastly between ownership groups. A landlord’s willingness to spend time and resources on preventive maintenance and addressing minor problems — prior to them growing into crises — can be the difference between a tenant turning a steady profit or facing large, unbudgeted expenses and possibly going out of business.
Further, some property managers may choose short-term, ineffective Band-Aid solutions that can end up costing tenants a lot more money in the long run. Another consideration for tenants is whether the landlord requires its property manager to competitively bid out routine services, such as landscaping, snow removal, fire alarm maintenance, etc. This simple requirement ensures that tenants are getting quality service for the best price. Tenants should seek a landlord willing to invest in experienced, attentive and proactive property management firms with strong business acumen.
Second, since industrial tenants are almost always signed to triple-net leases, increased costs are borne exclusively by the occupier and they end up paying for all of the operating costs of the building, while the landlord is responsible for only structural repairs to the asset. Thus, due to the inherent shift of risk and cost, choosing the right landlord (and property manager), rather than simply the right building for their operations, can result in significantly more cost savings over the length of the tenant’s lease.
Last, an expert property manager should act as a partner to the tenant, encouraging transparency, consistently communicating, and collaborating on problems together. This partnership should include providing a range of services to mitigate financial risk for both parties, such as keeping accounting records current, providing updated forecasts, and negotiating payment plans for any necessary renovations at the outset of leasing or when significant capital improvement projects are completed during the lease.
Effective property managers plan site work strategically, deferring capital improvements that aren’t urgent and creating a tailored, thoughtful timeline for construction to ensure minimal interruption to a tenant’s business. A good property manager should also assist in finding the most qualified contractor to complete the job while diving deep into the scope to value engineer the sturdiest and most affordable fix.
Bonus points go to property managers who are available 24 hours a day for emergency response. Even for tenants who do not operate 24/7, problems with the building can occur at any moment. With much of today’s distribution being connected to e-commerce, last-mile and next-day delivery means round-the-clock processing and distribution — so disruptions can cause operational nightmares and extremely high costs.
As occupancy costs are unlikely to return to pre-pandemic levels, tenants should proactively choose landlords and property managers who are sensitive to mitigating disruptions and unexpected expenses. Likewise, property managers must act as partners to tenants and implement solid management plans to maintain industrial spaces. Simply put, to survive in today’s ever-changing market, property managers and tenants must build and maintain symbiotic relationships to tackle the common enemy of rising business costs.
David S. Weissman is managing partner at Greek Development.