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Value Lurks in Unused Spaces Identifying Opportunities for Additional Revenue
October, 2008
By George Chambers
The current economic crisis is creating more scrutiny and additional pressure for commercial property managers to find other revenue opportunities and maximize the income potential of their managed assets. An increase in asset revenue not only improves the bottom line, but also increases the value of the property.
At a current capitalization rate of 7%, for example, an increase of $1 in net operating income creates a $14 increase in the value of the asset. By deploying the appropriate strategies and tactics, landlords and professional property managers can enhance the value of their properties. In many cases, a series of procedural modifications and thoughtful tactics coupled with professional advice can push investment to the next level.
It starts with leasing the property to its highest and best use. Applying the basics of professional real estate management can serve as an excellent foundation in the process of unearthing opportunities for increased revenue and value.
MEAUSUREMENT, AUDITS, OPERATIONS
On a list of best practices, employing international property measurement standards is at the top. In many cases a simple re-measurement of the building according to current standards can translate into an increase in the building's aggregate rentable area of 5% or more.
A review of accounting and lease administration procedures can create additional revenues as well. Auditing the tenant database is a valuable process for maximizing the recovery of operating expenses under each individual lease. By re-examining recovery methodology and applying it to the database, the property manager can ensure each tenant is paying proper proportions of utility and other recoverable operating expenses, preventing future slippage in income and increasing the building's revenue.
The building's operating expense is a major aspect of competition in the commercial rental. Prospective tenants will measure this factor when looking for space and use it as a basis of comparison between possible locations. Restructuring operating expenses and looking for cost savings through competitive re-tendering of service contracts and/or conversion or retrofit to green programs and services, such as waste recycling and energy cost optimization programs, can play a major role in tenant attraction, while reducing costs.
CAPITALIZING ON NEW TERRITORY
Underused areas can turn into a gold mine of additional rental area. By reconfiguring the main lobby, for example, property managers can create new rentable area to house additional tenants, creating revenue and lowering operating expenses for other tenants.
Locating services - perhaps in that newly restructured lobby - will create added convenience for tenants and their employees, and is a very effective means to improve tenant satisfaction and tenant retention. The convenience of a car wash in the parkade, a dry cleaning service, or on-site caterers makes things easier for companies and employees in the building. Landlords can also negotiate a licensing fee for these services that will flow back to the landlord, generating additional income.
Floors below ground level have traditionally been earmarked as parking and maintenance storage areas, but the technological revolution has provided landlords with an opportunity to leverage this space to potentially increase revenue sources. Air-conditioned and secure underground spaces are ideal locations for housing servers or communication infrastructure for the building's tenants, for example.
These spaces offer a convenient on-site location for technical infrastructure without consuming valuable office space, while providing an additional revenue source for the landlord. Meanwhile, on the rooftop, opportunities for cell phone towers can generate extraneous contractual income.
Advertising signage is another valuable tool in improving property value. Market demand for advertising signage such as billboards and electronic media screens can be lucrative, particularly in a prime location (think Yonge-Dundas Square in Toronto or Times Square in New York). Landlords can leverage location and building exterior to gain additional guaranteed income.
A property located in the heart of the city often leaves little option for outward expansion, but that's not the end of the road. Many buildings have been built with the structural capability to accommodate additional floors.
This can be a cost-effective option to increase revenues on a large scale because major elements of the infrastructure, such as utilities, parking facilities and sewage systems, are already in place. Approvals for increased density from the local municipality are crucial and sometimes lengthy, but increased value from the additional rentable area is exponential.
STOPGAP TENANTS
Film and television production has become a discernible source of income in the past few decades. A vacant unit in an office building can be prime real estate for set design, offering a blank canvas with realistic backdrop and little distraction.
Such tenants are normally short-term leaseholders, offsetting vacancy cost slippage. Production companies can fill the window between tenants, which on average leaves a six-month gap with no revenue for the given space.
The length of the lease is also a bargaining chip for landlords, allowing for increased rental rates due to the brief period of occupancy. In the case of a blockbuster movie or television series, the presence of the crew and 'stars' also adds to the appeal of the asset for current and future tenants.
When the market is tightening, owners and managers need to recognize opportunities to improve value that can optimize business, boost tenant retention and market attraction. This can increase both the bottom line and the value of a property investment.
George Chambers, CCIM, CPM, RPA is Senior Vice President with Colliers International Real Estate Management Services group, Canada's largest third party commercial property manager and a leading commercial real estate company that provides full service solutions to real estate users, owners and investors. He can be reached by email (George.Chambers@colliers.com) or see the web site at www.colliers.com.
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