No one would argue that 2009 hasn’t been a tough year for the commercial real estate industry. But many companies are discovering that the property or asset management arm of their firms remain a reliable, and important, source of fee revenue. Dave Petersen, chief executive officer of the Asset Management Group at Oakbrook Terrace, Ill.-based NAI Hiffman, recently spoke with Midwest Real Estate News about the growing importance of property management. Midwest Real Estate News: The property management division has always been important for NAI Hiffman. Today, though, it seems more important than ever. Is this true? Dave Petersen: I find the discussion going on around our industry regarding property management to be very interesting. Companies that have only been focused on the transaction business – investment sales, leasing, product representation – and not at all on property management, are all of a sudden realizing that property management is an important element in sustaining fee revenue to help keep the lights on. If they are operating the business correctly, it represents much more value to the business than utilities! For companies that have already been invested in the property management side of the business, and I certainly put NAI Hiffman in that category, we are conducting business as usual. For us, it’s just another element of providing real estate services for our customers.
MWREN: Are you surprised now at how many companies are looking at property management as a key to their survival in these tough economic times? Petersen: I am intrigued that the business is now being viewed as a more important component in the industry. I would say, though, that for us, and for a few others who have been focused on this line of business all along as a core service, the problems we are facing are now changing. We are facing the threat of occupancy being diminished in buildings. We are looking at the threat of delinquencies becoming more common, being more of an issue for our investor owners. We are also trying to figure out aggressive repositionings of some of our assets. Again, it’s business as usual, but with a different set of issues to keep us awake at night. That’s how it is, though. This business is always changing and we need to be constantly adapting to and anticipating those changes on behalf of our clients.
MWREN: So, how important has property management become to commercial real estate firms? Petersen: It is a critical element of our services platform because it’s important to our client, first and foremost. It’s clearly a source of multiple fee revenues, which also generates a construction service element that trails from the deals you do on the buildings you are managing. There are opportunities to provide agency leasing and representation of the building. There are opportunities that lead to disposition and acquisition and all the business that feeds off of that. It is an important and essential competency that I think real estate companies, if they are intent on providing a full line of services, have to offer to their clients.
MWREN: What are the biggest challenges today in the property management business? Petersen: You certainly have tenants who have long relied on their lenders to fund the ebbs and flows of their cash operating needs based on business cycles and purchasing cycles. These tenants have traditionally been rock solid companies. But for whatever reason, their lenders have now pulled back in some cases. Because of what is going on in the global economy, we now have to recognize that even companies with great histories might not be able to meet their obligations right now. That area of business failure is what makes you toss and turn about at night. Those payments are the blood that makes the heart of the business machine operate. The delinquency issue is a big one. At the same time, you have some very strong institutional landlords that hire us to manage their assets who are well-positioned to weather that storm and will make the right strategic decisions.
We also have issues with tenants who may be taking advantage of the market situation. They may be using the existing financial conditions as a business plan to potentially exit certain obligations. That’s another important element of this business today: You have to discern what is a real situation versus one that is not quite real, one in which tenants are using the market as a way to negotiate better rates for themselves.
MWREN: How do you work around some of these challenges? Petersen: If we do have an asset in trouble, we have our new Lenders Solution Group. It’s a group that we started in January. The group works directly with lenders and loan servicers to help them work out of troubled assets that they now control. We also help them when they are trying to work with their borrowers so the borrower can possibly retain their assets. So they can bring in a specialty service group like our Lender Solutions’ expertise to more efficiently manage the day-to-day operations of the asset, reposition the asset by leasing up the vacant space, and then ultimately facilitate the sale to dispose of the asset.
MWREN: When you look at the commercial real estate industry now, do you see any signs of hope on the near horizon? Petersen: I think it is possible that we may be sitting on the bottom now verses going further downward. I guess that’s what everyone is hesitant to state with a degree of certainty but we are seeing signs of some positive activity. Optimism might be too strong an emotion still, however for our firm, things aren’t worsening now. Rather I am counting on the market having just flatlined for the moment. You do worry daily about whether you are reading that accurately, though. And what does it mean if the market is flat when you are considering your next-step strategies?
MWREN: What steps are you taking to get through this rough market? Petersen: Externally, as we are dealing with our tenants and our customers, we are really focusing on how important it is to now have clear, open communication. We stay in constant contact with tenants when the operating costs of a building are changing. It could be that we had massive snowfalls one winter and into spring. The costs, then, for operating that building goes up accordingly with that expense. We communicate earlier with tenants about where operating costs are moving, so that they can budget and plan appropriately. There is a higher level of communication being shared with tenants.
Internally, we are being very careful about the operating expenses of our own companies. You can’t read a newspaper or trade magazine today without seeing news about layoffs. I’m proud to say that thus far we’ve had no layoffs in our company. We have realigned people’s responsibilities. And we’ve been careful with our resources and our spending. We, like all others, have gotten creative with our internal spending. But we have taken the right steps I think we’ve needed to take to get through this economy. At the end of the day, we cannot ask our client to entrust us with their business if we have not effectively managed ours! That includes our having done so before the global economic issues arrived.
MWREN: Are there any silver linings in this economy? Petersen: This is a great opportunity for us to hire some amazing talent that is available. For example, we started our Lending Solutions Group earlier this year. We’ve invested in hiring multifamily and industrial investment sales individuals during these times. We’ve added brokers to our staff. There have just been some great opportunities to take advantage of the tremendous amount of talent moving around the industry right now, as well as customers impacted by the constant reduction of staff and resources being eliminated by many of our competitors.
MWREN: You’ve been in this business a long time, so you’ve seen other economic slowdowns. Do any of them, though, compare to this one? Petersen: There is no question that our economy is shaken to the core right now. But there are two approaches to this: You can accept that, and you can wait it out with the expectation that it will return to whatever your definition of normal is. Or you can adjust. We are choosing to adjust.
I happen to believe that the economy will become strong again as it always has done in the past. But I don’t think it will ever be the same as it was before this or any prior downturn. If you are waiting for the economy to return to that exact point where it once was, you are going to have a long wait because many of the old rules no longer will apply. You have to adjust right now. You have to view this as an absolute opportunity to expand your business or to redefine your core business. It is all about the talent of the people you have on your staff. You can continue to sell your processes and procedures but everyone has those fundamental tools. At the end of the day, it is the quality of the people that you have on your team and the results they create that separates the truly good firms from the average firms.
MWREN: Besides the people, what else separates the successful real estate firms today from the ones that are struggling to survive? Petersen: The other element that separates the winners from the losers is how well firms have integrated their various real estate disciplines together during this time.
Have these hard times led your company to gain cohesiveness with all its various disciplines? Or has it separated all your company’s groups into silos? Even before the bottom fell out, we were working as a very cohesive group. These tough economic times, though, have further solidified the management folks interaction with the investment sales folks, who have engaged in business with the leasing and tenant-rep folks. We are all talking together in much more detail now. We are all sharing with each other what we’ve been hearing about the market. We talk with each other about what is going on and what rumors are circulating about our competitors. There is good that comes out of every downturn in a market but being open to change is the critical measure of your ability to adapt to the lessons to be learned.