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Curbing operating costs in commercial real estate

By Josh Guernsey & Tom Hall

Sticker shock (as defined by the Merriam Webster Dictionary): Astonishment and dismay experienced when being informed of a product’s unexpectedly high price. 

Does this accurately describe your emotions as you review your commercial property operating budgets for 2018? Well, join the crowd!

In 2018, many property owners and tenants alike will be faced with the challenge of increasing operating costs for commercial properties. Considering the recent assessed values placed on commercial real estate in 2017 and the subsequent increase in property taxes, many owners are finding their overall operating expenses (NNNs) are rapidly rising, even approaching a level equal to base rents for certain property types.  Whether base rent or expenses, every tenant’s overarching concern is their total cost of occupancy.  So as operating expenses increase, there is a natural downward pressure placed on base rents landlords can charge.

At one point or another, every successful business discovers the importance of cost control. This balancing act of revenue and spending is crucial to a company’s survival and success. Like any business, great owner/operators of commercial real estate target ways to minimize expenses by laser focus on optimizing controllable operating expenses. 

Controlling operating expenses is a bit like trying to lose weight, in that there must be sacrifice and intentional changes to achieve your goal. Sacrifice can come in the form of replacing systems for more efficient models, and intentional changes could include more frequent maintenance and controls. Here are some creative ways to control operating expenses in your property:

Non-Peak Hours.  Clean office space during the day, instead of afterhours, to reduce labor and utility costs.

Out with the old.  Replace old, inefficient electrical systems with newer, more efficient systems, capitalizing on the rebates offered by the local utility providers.  Most projects have a three year, or less, payback.  Replace old HVAC controls and other systems with newer, more efficient systems.  This will also improve the reliability of the system, to increase your customers satisfaction. 

Don’t procrastinate.  Perform regular preventative maintenance on major building systems to increase efficiencies and increase the longevity of the asset.

Tune it up.  Complete a commissioning of the building to ensure optimal operating sequences in accordance with the building operating hours.  This is like performing a tune up on a car ensuring everything is running smooth.  Rebates are available for this commissioning process.

Watch closely.  Install and enforce tight controls on all expenses.  Look to repair before replacing faulty equipment.

Be creative.  Get everyone involved with creative ways to control costs.  Ask your customers, vendors and suppliers.  Make it a game.

Hire the right team.  Hire people who come to work every day with passion and who treat the property like it’s their own. 

Help prepare for the inevitable rise in occupancy costs with a strategy to address it, and focusing on what you can control as an owner. By making mindful and proactive changes and focusing on efficiency, you can help lessen the impact of these increased costs and control operating expenses in your property.

Tom Hall is director of property management for Waypoint Property Management. Josh Guernsey is co-founder and managing partner of Waypoint Real Estate based in Fort Collins.

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