Skills of a Property Manager to Maximize Profits
A property management company undertakes all the tasks involved in operating and managing an office on behalf of a property owner. They are expected to play a broad array of roles, but the one that owners care about most is that of maximizing profits.
A 40% occupancy rate sores to 100%, bringing 2.5 times more rent income
Chiyoda Ward, Tokyo—one of Tokyo’s central business districts called “three core districts of Tokyo.” The JLL Japan Real Estate Operation Services Department received a request for operation and management services from a large-scale office building that was over 20 years old and far from any office district. When JLL was contracted for the service in 2015, the building’s occupancy rate was 40%, because a tenant who had occupied a large amount of floor space left the building. The building was acquired by a listed REIT, and JLL was put in charge of its property management undertakings. Koya Narumi of the Operation Services Department, who was involved is this case, says, “Having a tenant rent a large space will stabilize a building’s profitability, but once they leave, the vacancy rates plummet.” He worked on refilling the space with multiple tenants in order to stabilize the occupancy, taking the client’s wishes into consideration. The large office building, which was a rarity in the local area when it was completed 20 years ago, was a symbol of the area. However, as it got older and competitor buildings were built one after another, the building was forgotten. Not only that, but because the building was a condominium, it could not go through large-scale renovations—only a facelift, at the most. Even under these circumstances, the building became fully occupied in a year and a half, and rent income increased by 250%.
Contributing to the selling of properties at high
Another example is a case of a large-scale office located in Tokyo’s bay area. Although its accessibility by public transportation was poorer than office districts in the metropolitan center, a large amount of floor space was vacated. The occupancy rate was 40% in the beginning, and eventually increased to 90%. This building’s project was launched in April 2014, the building was sold in December 2016. Although it took longer than expected in the beginning, an opportunistic fund that owned the building successfully achieved upside risks in the rent, and then sold it to a listed REIT. Narumi looks back on this case. “Vacancy rates in competitor buildings also remained high, and the office market in that area was very tough.” However, the owner was in a high spirit. The owner was committed to give returns to investors, and it was out of question to lower the revenue goal. “The project itself appeared very difficult,” Narumi says.
The grade and potential of the property itself were quite high, but the building was not very accessible by public transportation in comparison to Tokyo’s central business districts, and there were a number of properties in similar sizes. This property makes a good example of cases that succeeded in increasing income by refilling vacant space in such situations. According to Narumi, JLL’s advantage is that it fully understands the roles that pro investors and asset managers—such as funds and listed REITs—are required to play in a securitization strategy. When these investors and asset managers invest to an office, they arrange financing after the rent—their income—is finalized. Therefore, a property manager must achieve the investment goals. However, quite a few property management companies shy away from these cases with difficult conditions. They must be able to develop and execute strategies toward achieving the goal of giving returns to investors. Otherwise, it will be impossible to complete the mission. “A property manager must take into consideration the background of their client’s needs, and take various actions to meet them. If they can’t do that, they are of no use,” insists Narumi.
There is no guaranteed solution
What measures, specifically, can lead a difficult project to success, then? Narumi offers his opinion. “There are no guaranteed solutions—we just have to go through with things that are taken for granted.” He also says that how familiar a property manager is with the property they are involved in will be called in question. For instance, it’s a bare-minimum requirement that a property manager not just have the specs of the building on hand, but be able to answer quickly and accurately to any questions a prospective tenant may have, for example, by preparing an area map which shows nearby lunch spots , banks, hospitals, , and parking lots. Not only that, but when it comes to leasing properties in the bay area, waiting patiently for the perfect time to lease properties is another key element. Narumi says, “It’s less convenient than the center of Tokyo, but there, prospective tenants can secure a large amount of floor space—that was the most appealing to them. So, we researched available properties of similar sizes in Tokyo, and waited until vacancies in those buildings were mostly filled before we put our properties in the bay area up for lease.” His case succeeded in working in line with the investment strategy of the opportunistic fund, without being swayed by near-term occupancy rates.
Readiness to meet the various requirements of a property owner serves as a yardstick for a property manager’s skills. For example, an investor that wants to sell a property in the short term, aiming for capital gain, will ask a property manager to come up with ways to increase the maximum value of rent income, while a listed REIT and others that intend to own a property in the long term will require a property manager to manage construction work for the purpose of stabilizing occupancy. “How difficult a property management undertaking is greatly depends on what kind of investor is involved, but we welcome challenges without hesitation,” emphasizes Narumi.
Establish trust toward rent increases
Meanwhile, the current office market is a lender’s market, and raising rent when the existing tenants’ leases are due for renewal is a good way to maximizing profits. However, “It is not easy to get tenants to accept a rent increase simply because the market situation is more advantageous to landlords,” points out Narumi. He continues, “To get tenants on board with the increased rent, you first need to have a relationship of trust with your tenants. Property management services for an office were mainly concerned with managing the ‘hard’ facility, but now, ‘soft’ services are bigger requirements.” From 2018 to 2020, a large amount of A-grade office space will become available in Tokyo, and chances are high that existing buildings would suffer from high vacancy rates if tenants moved to new buildings. “We are contracted for a number of buildings owned by listed REITs, and it is likely that they will struggle over vacancies when their existing tenants leave. We cannot keep competing just by renovating ‘hard’ facilities. We have to revamp other aspects as well, for example, we could invite food trucks to serve lunch at locations with few restaurants nearby, introduce free Wi-Fi in the building, or install a lounge or smoking room whose doors are linked to the smart key for the building in the common space. The key to success is to listen to tenants’ needs and provide added value,” states Narumi. A property manager is required to have the persistence to see things through to the end, even things that are taken for granted.