The Top 3 Challenges of Commercial Property - Part 3, Ineffective Management

28 Jun

Looks like another case of poor property management

Part 3 - Ineffective Property Management

In this part 3 of a 3 part series, I look at common issues facing Commercial Property Management in Auckland and provide some tips to help keep your Commercial Property running smoothly. Check out Part One on Tenant Retention and Part Two on Vacancies.

The one thing that can make or break your commercial property investment is the standard of Property Management you provide. It will be the difference between a successful, profitable commercial investment and one that fails to perform.

You cannot control the economy, the cost of funding, or the success of your tenants, but you can control the quality of property management. Great property management will help your investment weather the storms of recession, pandemic, and any other factor beyond your control.

4 Signs of Ineffective Property Management

High Tenant Arrears - Tenant arrears are the barometer by which I assess any property managers performance. There will always be tenants that are struggling and arrears are part of the business, but if there are arrears, they should be carefully managed. High levels of tenant arrears can indicate that the property manager is not proactively chasing arrears, and that tenants are either not paying because they are not able to or because they have reasons to contest their lease costs. Either issue should be addressed quickly to avoid escalation and debt levels becoming too large to manage.
Tenants that Do Not Renew Leases - Moving your business is expensive. If your tenants are choosing to move rather than renew their lease, it likely means that your property is not being managed well. It could be because of parking or security issues that have not been addressed, problems that have not been resolved or maintenance has been deferred. There are other commercial reasons that businesses do not renew their leases, but if you are seeing a lot of tenants exiting it could very well indicate underlying management problems.
Obvious Neglected Maintenance - One of my local town centres is a regular stop for me for retail and convenience, and for a while I noticed that there were lots of potholes in the tar seal, the line marking was very worn and there was damage to the building that had been there for a while. Because of this poor standard of presentation there were other issues creeping in, like dumping of rubbish and graffiti. Your property should always be clean, tidy and well maintained and if it is not then you should review your property management contractor.
Unhappy Tenants - Unhappy tenants are the clearest indication that your property management is not performing. They are also the biggest threat to your investment. Unhappy Tenants don’t tend to pay rent on time, if at all. They don’t renew their leases and contest every rent review.
Businesses struggle for many reasons, and I have worked with many struggling business owners through the covid pandemic, through insolvencies and business closures as well as illnesses and bereavements. No matter what issue the business was facing, as long as I provided professional property management service and support, we could find a way to work through their issues together.
Once property management services drop and tenants feel neglected then whatever issues their business may be facing become easier to blame on the landlord. For example, a drop in customers can easily be explained by the lack of parking or neglected cleaning.

How do I Achieve a High Standard of Management?

What are the Options of Commercial Property Management?

Historically there are two options for managing commercial property. Self-management, where the landlord manages the property themselves, or contracting a property management company to manage your assets for you. Both can be successful. CPP has introduced a third option to the Auckland market, whereby Landlords can be as involved in they like in the management of their property but also have the support of a Commercial Property Professional when they need it.

Make Sure you Have the Right People Managing your Property

Whether you are self-managing your property or contracting this service out, it is important that you have the right people taking care of your valuable assets. The performance of your asset depends largely on this important factor. Understanding commercial property, leases, and to at least some extent understanding business and buildings are required for a Property Manager to be successful. Great property managers also understand how the economy, changing trends, and finance affects your asset and can advise you when there is a risk threatening your property or an opportunity you may want to capitalise on. Great property managers also are able to retain your good tenants and manage any tenant exits and vacancies to minimise the effect on your cashflow.

Establish Robust Outgoings Budgets

It is important that you get your tenant outgoings budgets right from the very beginning. If you do not allow enough budget for maintenance, repairs and cleaning, you will end up having to scrimp on these services and the standards of presentation will slip. It will also mean that tenants will face large outgoings increases and shortfall invoices which are never received well. Being able to properly maintain a property depends on collecting the correct amount of outgoings from your tenants.

Keep it Professional

There will always be conflict between tenants and landlords. The way that conflict is managed is essential to the success of your relationships and as such the success of your asset. During my career I have experienced conflict with tenants that have had personal issues, whose businesses were struggling, or were genuinely unhappy with the management of their property. During Covid 19, most business owners were stressed and anxious about how their businesses would survive as well as fears for their health. When tensions run high it is easy to lash out at the landlord or property manager. When these conflicts are managed professionally, they can actually strengthen the relationship. During the first wave of the pandemic in April 2020, I made an effort to phone all of my 160 tenants to check in with them. Many of them were angry and anxious but those calls demonstrated to them that I was available to assist them as we navigated the subsequent years of uncertainty, and as a result very few tenants actually closed their businesses during that time.

CP Pro Tip: Conflict between tenants and property managers is inevitable, however when handled well, it can actually strengthen your relationship.

Keep an Eye on the Big Picture

Plan for the future, understand how your area is evolving, look for opportunities and understand your property’s place in the market and in your location. This can be as simple as making sure you plant the right trees that are not going to grow too big and have roots that damage your pavements and underground services, or as complex as planning to accommodate businesses in the future that will service a developing suburb. Commercial Property is generally a long term and often a multi-generational asset so having a property manager that can think past the current conditions will make your asset perform well for years and generations to come.

But Don’t Neglect the Small Stuff

No matter how small the issue might be, deal with it immediately. This means following up your cleaners the first time you are aware that the cleaning was not done on time or to the agreed standard. Remove graffiti immediately. If your tenant asks for permission to change their signage, respond as soon as you can. Follow up arrears early and often. If you don’t get a response, try other ways of contacting them. Use email’s, phone calls, or visits in person. If your tenants business is struggling, they are likely to try and avoid you and if this is the case it is even more important that you track them down and find out what the issue is. Small issues can easily escalate into large issues and large issues can lead to vacancies, extensive damage, or breaches of lease.

Keep on top of your Lease Dates

Some landlords believe that they are being kind to their tenants by not carrying out regular rent reviews, however, when a rent review has been neglected for 4, or 6 years, the catch-up rent review is likely to be larger than your tenant can easily manage. It is not always apparent to them that they have benefitted from years of reduced rental, and an increase of 20% or more seems unreasonable and is likely unaffordable. Regular rental increases per the agreed lease terms are best for both tenants and landlords. Lease renewals, expiries and other dates are also important to keep on top of. Your lenders will want to see that these have been carried out and that you have guaranteed income demonstrated on your tenancy schedule.

Best Practice Property Management is not difficult to achieve, and it is much easier to manage a property well rather than deal with the problems that arise from neglected tenants or maintenance.

If you are interested in hearing how CPP’s Property Management service can help your commercial property succeed, email me today. My initial consultation is always free.

Regards,

Kirstin