Asset management plays a very critical role in creating value for building landlords in the world of commercial real estate.
This is an intensive business in which investors — or landlords — are there for one reason: to make money. And while the goal may be singular, the business itself is complex and multifaceted. The highly competitive and cyclical nature of commercial real estate makes it very dependent on the highest quality of asset management in order to maximize the return on the landlord’s investment.
Landlords typically rely on asset managers as their eyes and ears for advice on the local real estate market and for guidance on their $100 million buildings. Sadly, some asset managers have precious little insight and even less common sense when it comes to helping landlords minimize risk, much less create any real value.
Before scurrying to your computer to pull up my e-mail address, please note that I used the word “some.” By no means is this intended to be a broad-brush assessment of all asset managers in San Diego’s commercial real estate market. Most professionals in this critical line of work are just that — highly professional and successful at managing these multimillion-dollar investments of glass, steel and masonry. But there are those for whom “manager” simply does not apply. These would be more accurately described as asset “blunderers” or worse yet, just plain idiots.
Consider two local examples that serve as primers for what not to do in commercial real estate asset management.
Building A is a prominent high-rise located in downtown San Diego. It’s in a premier location with a roster of great tenants. Soon, a large percentage of those tenant leases will be expiring. One of those tenants — occupying roughly 20 percent of the building — is essentially landlocked. The firm needs more space immediately.
Since the building’s ownership is overseas, it must rely on its local asset manager for guidance. The grossly inexperienced manager has failed to respond to the tenant’s space problem, and it’s highly likely that this multifloor tenant will have no choice but to leave the building.
That should be unthinkable. The cost of losing this tenant will be enormous. The vacated floors will need extensive tenant improvements. They will need to be converted from a full-floor user to a multitenant floor, which will trigger additional fire-life-safety and Americans with Disabilities Act-related costs. Add to that the fact that the floors will have a lapse in tenancy of at least six months, even in a hot market.
Using the rule of thumb that one month’s rent equates to $0.03 per square foot per month of lost “effective rent,” the landlord is losing at least 18 cents per square foot of effective rent over a likely six-month vacancy. The $20 per square foot that the landlord will spend refurbishing and reconfiguring the space translates to an additional $0.02 for every tenant-improvement dollar spent, or a $0.40 loss on effective rent. Added together, the loss reaches $0.58 per square foot per month. When we multiply this factor by a 100,000-square-foot tenant over a 60-month period, we see that the landlord is losing nearly $3.5 million in the value of his asset — not to mention the lost cash flow. What’s sad is that the landlord won’t see what’s hit him; he’s overseas. The unresponsive manager will remain in control of the building asset he is mismanaging.
While my sense of frustration is focused on this particular situation, I must point out that this type of non-accountable management style is evident throughout the county. It hurts everybody.
Here’s an even greater example of asset management idiocy. Building B has a tenant who occupies more than 25 percent of the building. The landlord and tenant have had a litigious relationship; there have been three lawsuits between them during the leasehold. In the middle of the most current lawsuit over the lease, the landlord decided to sell the building. Trouble is, the asset manager has not gotten around to disclosing to the prospective buyers the fact that there’s a lawsuit pending — presumably hoping the problem can just be swept under the carpet.
Instead of working with the tenant to resolve the issue, the manager, who it so happens is based outside San Diego County, has insulated himself with attorneys. Anyone in his position with half a brain would get in front of the situation and work to achieve a settlement in order to enable his landlord to sell the building “clean.”
Frankly, the landlord deserves equal blame for not holding the asset manager accountable and/or using a manager who is either unwilling or unable to deal with crisis situations.
In summarizing this article, I pose three questions: (1) Why are the relatively few incompetent asset managers involved with such high-stakes properties as the two buildings I referenced as examples? (2) Why don’t landlords hold their asset managers more accountable for not only protecting but also enhancing their assets? (3) How about a system in which the tenants who actually pay the rent to operate the building hire and pay for the asset manager?
Jason Hughes is chairman, CEO, and owner of Hughes Marino, an award-winning commercial real estate company with offices across the nation. A pioneer in the field of tenant representation, Jason has exclusively represented tenants and buyers for more than 30 years. Contact Jason at 1-844-662-6635 or email@example.com to learn more.