Magazine article Journal of Property Management

Preparing for Tomorrow

Magazine article Journal of Property Management

Preparing for Tomorrow

Article excerpt

As the saying goes, "Make hay while the sun is shining." It is safe to assume the recession of 2001 is behind us, and the economy is now in a growth phase. This phase is somewhat tentative and may be sluggish with the second shoe yet to drop. But the window of opportunity is an excellent one in which to properly position your properties to weather the next storm. Follow these recommendations to better position your properties.

Tenant retention: While "location, location, location" is the mantra of brokers, property and asset managers should chant "retention, retention, retention." Keeping existing tenants is always more cost-effective than replacing them. Be proactive by anticipating and preventing problems, and provide clean, efficient and expert property maintenance. Spend more time in person with your tenants.

Market knowledge: Occupancy and rental rates are falling, and because they lag the overall economy they are likely to fall more even during the early stages of a recovery. Be proactive and know your market rather than waiting for high vacancy to dictate rental adjustments. When investigating competitive rents in a transitional environment, dig deeper than the "comp" analysis. Leasing brokers are a great resource. Meet with them and understand the details of the deals they are putting together. As the tech-wreck has shown, the vacancy rate alone might not tell the whole story. Even though they don't show as a vacancy, subleases compete with conventional office space.

Credit tenants: Select tenants with the best credit rather than chasing the highest bidder. Obtain credit reports and historical financial statements. Compare tenants' financial statements to those of publicly traded companies in the same industry. Check how their profit margins and debt burdens compare. If necessary, seek an outside opinion on their financial statements from a CPA or business analyst.

Rent roll. Stagger lease terms so there are not a significant number of leases expiring in any given year. Consider alternating 30-, 40- and 50-month terms with the usual 36-, 48- and 60-month terms. Discuss renewal possibilities with tenants at least three to six months before their lease term ends.

Debt structures: Interest rates are at historic lows and are not likely to go lower. Maintain low leverage and replace expensive or variable rate financing with cheaper fixed rate financing. While leverage can maximize owners' return during periods of growth, it also magnifies their risk during uncertain times. A loan-to-value ratio of 65 percent could provide a good balance. Where possible, consolidate secondary and mezzanine financing into new primary debt.

Debt Leads to Double-Dip

Despite these positive indicators, some signs suggest the "perfect storm" may be brewing. Consumer and business debts are at historic highs. Those seemingly beneficial low interest rates have also served to tap out consumers' purchasing power, and the consumer accounts for two-thirds of all economic activity. Interest rates are increasing, and after adjusting for inflation, they are not as low as they would seem.

Also, fiscal and monetary policy has adopted a less accommodative stance, the housing market may be forming a bubble, and the stock market (an uncanny leading indicator) has been tentative. Typically, many of these items work their way into equilibrium during recessions. But at this point in the recovery process, some have yet to show signs of correction.

Stephen Roach, Morgan Stanley's chief economist, sees a double-dip possibility due to consumer debt: "Payback is inevitable," he said. "This speaks of an imminent relapse in consumer demand, precisely the stuff of the classic double-dip. …

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