The common approach to property management is broken and is not delivering optimum results, in my opinion. Here is why I believe this.

The Wrong Focus

The focus of many owners and property management practitioners is on ‘managing the property’ and ‘cost containment’. I feel those are the wrong areas to concentrate your efforts on. But don’t get me wrong - curb appeal, asset preservation and efficient financial management are all key points, they just shouldn’t be the primary focus of the property manager.  Why?

Let’s first look at it from the manager’s perspective. Curb appeal, asset maintenance and repair are visible demonstrations of active management, and some would say good management. It is easy for the manager to report to the owner(s) that something was broken and is now repaired or something was dirty and is now clean. I call it “cleaning the glass and cutting the grass” management. I don’t really blame the manager for concentrating on things they can point to as the result of their active management.

The real estate management industry is almost invisible to the general public. When everything is working properly no one notices. The elevators run, there is no garbage in the hallways, the temperature is comfortable, etc. These are expected norms. But if anything goes wrong, everyone notices. As a result, property managers toil away in obscurity. Unless they make a point of letting their employer, client and customers know of the physical, demonstrated fixes they made it is easy to have their work go unnoticed. Cleaning the glass and cutting the grass a simple way to validate their worth.

Now the owner’s perspective. Obviously, if things do go wrong people notice and when people notice they tend to comment or complain. In worse case scenarios, the situation can make national and international news. It is in the best interests of the owner to have no complaints, or bad news. A poorly maintained building is also more difficult to lease; which affects occupancy and rents.

Owners want their property to be competitive in the market when quoting lease rates and they would prefer to have the maximum amount of ‘gross’ or total rent paid go in their pockets rather than flowing through as maintenance and operational payments. Therefore, owners also look carefully at cost containment.

On face value both managing the physical asset and containing costs are sound practices for both the manager and the owner. And let me repeat, they are both important and prudent. The issue is when these become the primary focus of the property manager.

Effective asset preservation, or managing the property, should be considered a given in the industry. My feeling is any company - or anyone - who can’t execute correctly on this point should seriously consider their future in real estate. So, if this is a given, the need to demonstrate active management by spending the bulk of a manager’s time in this area should be taken off the table. It is no longer relevant for the manager to prove their worth this way.

There are also far better ways to ensure asset preservation than having the property manager handle this area. The solution lies in the organizational structure, a new set of practices and in technology. Likewise, a primary focus on cost containment does not provide for optimum returns. There are many reasons for this.

The first reason is that every building has a base line of costs that must be spent. Attempting to operate below that line affects asset preservation and curb appeal; which, in turn affects leasing and brand.

Another reason is that until that base line is reached, the effect of cost reduction is diminished over time. A simple illustration for this is to place 100 pennies on your desk and remove 10% of them at a time. The first time, you will remove 10. The second time you will remove 9. The third time 8 pennies will be removed. Each time you remove a fewer number even though you maintain the same 10% percentage target.

In practice, it becomes more difficult to maintain a constant 10% reduction. At the beginning inefficiencies may be easier to spot but over time, as one moves closer to the base expenditure line, the challenge shifts from inefficiencies to making choices that may affect the asset.

Effective financial management and efficient operations should also be a given in the industry, but a race to the bottom of the price tier of comparable rents should not. This is not optimizing return, though many believe it will. Do you agree?

Companies such as Walmart, Amazon and Costco, just to name three, have shifted the public’s perception of price. Other retailers who attempt to price match them found their margins cut, sometimes to the point of irreparable losses. Their perception was that they needed to price match to attract customers. They commoditized the products they sold and even their business in order to price match. However, many didn’t realize that these three companies (and others) created a different operating model and they weren’t simply operating on a thinner margin. The same thing happens when owners and managers look to achieve comparable rents without looking at the modelling behind the other rents.

The effect of operating cost reductions on increasing base rent in triple net properties also takes time to bear fruit. The concept is sound. If the total rent is, say, $10.00 with $3.00 going to operating costs and $7.00 to base rent; it would be more beneficial to have $2.00 in operating costs and $8.00 in base rent.

But the ability to realize that potential uplift may be years away depending on the term of the lease. Moreover, because triple net leases have compartmentalized rents, savvy occupiers will still negotiate the base rent and discount the operating costs as there are variables beyond the owner’s and manager’s control. In fact, some will use a low operating cost as an argument to lower the base rent claiming that the level may be below the base line required and thus it is unsustainable over the lease term.

Base year and modified gross leases that escalate every year can be trickier.

Again, I believe that sound and efficient financial management is important and should be a given in the business. I also believe that any ‘given’ in the industry shouldn’t be where the focus lies.

Return on Investment

Time and effort is usually spent on those areas where there is a focused outcome. In the traditional approach to property management, time and effort are mostly spent on managing the physical asset and cost containment activities, followed by reporting those activities to the owner.  Ask a manager to keep a two week diary of their activities and you are likely to find this to be true. Imagine an inverted triangle representing their time allotment. If their time was plotted on this triangle the widest part would contain operations, repair and maintenance activities, followed by cost containment and financial management, followed by reporting and so on to the smallest tip of the triangle.

The time spent on the top three activities in the triangle, that are common throughout the industry and should be minimum expectations, provide little tangible return as compared to other activities the manager can perform. The 80/20 rule applies.

Unfortunately, the traditional and typical approach to property management perpetuates the model. It is the first reason the current system is broken and not producing optimum returns.

Lease Enforcement

The second reason owners do not achieve optimum returns from the traditional property management model is a reliance on lease enforcement practices in property management. I am all for lease compliance and believe that both the landlord and tenant have to uphold the obligations in the lease.

However, using the lease as an ‘enforcement’ tool is commonly unproductive. By definition, enforcement is an ambulatory action and occurs after the fact. If everything runs smoothly, then enforcement wouldn’t be needed. The concept of enforcement dates back to the Middle Ages and the concept has inherently remained unchanged through to today – though the legal system has significantly complicated it.

I am not advocating that the lease be locked in a drawer and remain untouched during the term, nor am I suggesting a “Pollyanna world” where everyone always does what they are suppose to do. There are times when the lease must be enforced. My beef is when the property management system starts at enforcement because there are few options thereafter. A doctor doesn’t remove a broken arm. Instead the arm is placed in a cast.

Enforcement is a negative concept and tends to create an adversarial approach. This is counter-productive as it colors the supplier/client relationship.

Conversely, establishing and then continuously reinforcing conditions of mutual satisfaction creates a dialogue and positive atmosphere. Unfortunately, few property managers practice this because of the reliance on a process favoring enforcement. Moreover, there are few processes and systems in use today that support this mutual satisfaction concept .

How to Fix It

There are many other reasons why I believe the current property management system is broken. But by now I hope you see that the traditional way property management has been conducted over the past 100+ years – its standard structure, practices and technology - can’t continue to work. It is too simplistic to suggest that the way to correct and modernize the approach to property management is to flip the triangle, but that IS what needs to be done.

Returns are optimized by changing the focus and business model. It is something we have accomplished, but it takes new structures, systems, processes and procedures. Managers and others in the property management industry require new and different training.

As a result of our focus we have achieved rent 35% above comparable properties, created brands for the properties we’ve managed, increased occupancy to as much as 100% with waiting lists, increased renewal intentions by over 20% and generated 17% more rent tolerance at renewal.

We know what needs to be done and can do it for your company. Today’s returns must come from ongoing holdings. Doesn’t it make sense to have the most effective property management system in place to optimize those returns?

© 2011

Peter D. Morris SCLS, SCSM, SCMD

Greenstead Group LLC

Glendale, CA 91202

213-840-9879