Building & Facilities Operations

I was intrigued to read an article in the New York Times the other day about how law firms are beginning to offshore some of their clerical processes to India in order to drive down costs.  They are doing this largely because their large corporate clients are insisting on cost reductions, not because they are particularly forward thinking.  Why pay for a New York based associate to copy edit a document at $250 per hour when it can be done for 1/5th of that rate by a double graduate in India?

Now, large corporate law firms are pretty darn conservative and not organizations that adapt to change easily, so the fact that this is happening is an indication about how much sectors of our economy are likely to change over the next 5 – 10 years.  We have all gotten used to hearing about manufacturing jobs being shipped overseas; those of us in the technology space know that the same is happening with jobs in our space, but this is an indication that other sectors, previously thought to be immune from the trend, will be affected.

This got me to thinking about property operations.  On the one hand, folks in this sector all provide services that are site dependent, like a hair stylist or plumber – until we figure out teleportation, you are going to have to pay a real live plumber to come and fix your dripping faucet: no way to offshore that service – so it should be largely unaffected by off shoring.  On the other hand, some of the property and asset management teams that I work with spend a lot of time on fairly low level clerical activities: copying, faxing, moving information from one silo to another.  These activities can (and will be) off shored.  Given the relentless downward pressure that owners put on asset and property management fees, this change may be forced on the property operations sector by its customers, as it is in the law profession.

There is a bright spot in all this: property operators that figure out how to streamline clerical processes and focus on providing their clients with higher value services will prosper.  Some of this value-add comes through using technology, like Building Engines‘ web based operations platform, to improve customer service, increase data liquidity and reduce operating costs.  I have run into a few that have made this a differentiator and who tell me that their clients are beginning to see it as a significant benefit.

The best defense is a great defense – Or so it seems to The National Football League (NFL), the nation’s premier sports league, which announced last Tuesday that it is relocating its headquarters to 345 Park Avenue in Manhattan and 175,000-square-foot,  down from its current 205,000-square-foot headquarters at 280 Park Ave.  This maneuver is no feint.  Faced with a down economy, an ongoing labor struggle, and declining attendance and viewership in all other major sports, the NFL has decided to protect its lead and play a little preventive defense.

This single commercial office transaction may be the clearest bellwether for the future of commercial real estate.   According to Eric Grubman, executive vice president of NFL ventures and business operations, the new space “will enable us to be more efficient.”  Apparently, NFL executives are as talented at the post-game empty quotation as their renowned players.   Reading between the lines, the NFL is in the midst of some serious game planning – a plan that still goes for the win, just with fewer players.   Let’s look at the stats.

A $7.8 billion dollar industry, the NFL boasts an average team value of $1 billion among its thirty-two teams; an average attendance of 67,000 and a consistent season-to-season winning record.  According to Plunkett Research, the NFL earns eight times as much each year for TV and cable broadcast rights as MLB, despite the fact that MLB teams play roughly ten times the number of games annually than do NFL teams.  Yahoo Finance says that “the pro football business is booming, and the expectation is that the NFL will set new records for fan viewership during the 2010 season.”  In fact, the NFL enjoyed a 9% viewership increase in 2009, and is expecting a 15% gain during the upcoming 2010 season.   To the TV viewer, the NFL is appointment television.  To the rooting fan, every game matters.   To America, the Super Bowl is iconic – the closest thing we have to commercialized war.   It is a growth sport, and is considering adding two additional games to an already profitable schedule.  In short, the NFL is giving the Heisman (read “stiff arm”) to every other major sports league.

So what’s with the contracting office presence?

The NFL is in the midst of a solid game plan; one they may share with the rest of corporate America – do more with less.   It embodies this new mantra.  Case in point:  In 2008, preparing for what it knew would be a tough 2009 and 2010, the NFL told 150 people that they did not make the corporate team.  To most industries, this would be sign of the apocalypse, but the NFL is expanding where other sports, such as baseball and golf, etc, are contracting.  Always good at cutting the wheat from the chaff, always a step ahead of its competition, the NFL is thinking ahead to a new sports economy – one underscored by efficient planning and cost controls.    Enable people to do more from the road.    Allow people to work from home.  Ask your employees to extend their hours and their signing bonus will be big – they’ll still have a job.

So look for fewer people in the seats – commercial office seats ? - a trend that may carry over to the balance of commercial America.  Growth through simultaneous expansion and contraction – expanding opportunity while contracting costs.   It’s a game winning plan.

There are a lot of definitions for a double-dip recession – some of them disgusting and all of them dire.  Generally, the following is the technical definition:

The economy fails to generate positive Gross Domestic Product (GDP) for two consecutive fiscal quarters, recovers with at least one positive quarter, and then drops into the negative again for two additional consecutive fiscal quarters.

Imagine showing a cup of water to a friend dying of thirst, then pulling it back at the last minute — or dropping into a deep slump, then hitting a game tying home run, and slumping again?  Double dipping is akin to adolescent teasing – more harmful than showing no relief at all because it cuts the heart out of hope.  It means nothing if you are in lower, unenviable recession-proof businesses like tombstone sales, sewage disposal or tax collection – all recession proof.  For the rest of us, however, an economic double dip is a harbinger of long and sustained stress on our lives.

For commercial real estate owners, double dipping can be devastating.  A “trailing indicator”, commercial real estate follows on an economic trend.  Protected by existing long-term leases, commercial real estate owners are not subject to the short-term ups and downs of the economy.  When a recession begins, commercial landlords are insulated from immediate harm because their lessees continue to pay the same structured rent no matter the current economic state.  Unlike hotel owners who, with single night commitments, feel the pain immediately, commercial owners have long-term commitment security.

On the other end of a recession, that lag can be painful but promising.  When the economy begins to recover, lessees begin to grow as employment and occupancy rates rise.  A well positioned commercial landlord can essentially “bridge” the recession with long term leases.  Growth may be slowed as tenants refill shadow space – unoccupied leased office space that has not been factored into the market’s vacancy rate.  Yet while that space gets reabsorbed, the asset will continue to throw off cash and then grow in value as the recovery matures.

However, an economic double dip will expand that recovery timetable and can collapse that bridge into bankruptcy or worse.  Faced with long term occupancy erosion and strong downward pressure on lease rates, Landlords may be forced to terminate capital improvement plans, settle for portfolio-wide lease rate reduction – all of which will seriously devalue their properties and result in higher cap rates.   Over leveraged properties are at a higher risk.  Cash flow erosion may lead to delayed or unpaid debt service.  Without the bank willingness to restructure debt, the properties may revert to the lender who has no business running them in the first place.  This condition may continue to spiral downward until the overall market devalues; pricing readjusts and the market begins to recover.  In the midst of a recession, a landlord who believes that a sustained recovery is around the corner will hold the bridge longer until his asset makes it over to the other side.   A double dip recession may cause a commercial office owner to reposition for growth too early, or give up on the market and let the building go fallow.   Double dipping is a feint from the marketplace from which commercial real estate owners may not recover.

Ten ways to protect your assets from the ravages of a double dip:

1. Never over-leverage your portfolio – Match fixed income to fixed costs to sustain a healthy projected NOI.
2. Stagger your lease terms to ensure that you will have adequate cash flow coverage to sustain your debt service no matter when a recession may occur, or how long it may last.
3. Diversify your portfolio (commercial, residential, retail, hospitality, etc) to ensure that you have a mix of long-term and short term leases and lease types that help you take advantage of a bull market and protect yourself when the bear arrives.
4. Perform necessary capital improvements when the cotton is high, with a strong emphasis on the word “necessary”.
5. Put proven systems in place that help you to expand services to your tenants when the economy is strong and easily contract costs (particularly FTEs) when cash flows contract.
6. Do not ignore normal preventive measures (maintenance, risk reduction, etc) in a down market – unexpected expenses will hobble your ability to survive.
7. Wait for a recovery to mature before acting like you are in one – don’t build your bridge too short or pop the champagne too early.
8. Know your tenants’ businesses; track their markets like you track your own.
9. Hedge your occupancy rate with a diversified set of tenant industries – “every retail mall needs a good pawn broker.”
10. Know your banker like you know your mother-in-law.  Hmmm?

Back when S.L. Clemens was piloting riverboats in the murky fog of the Mississippi night, his deckhand tossed a marked “sounding line” and stone overboard attempting to locate the river bottom and measure the depth for passage.  A riverboatman would cry out the depth in marks for safe passage with “twain”, two fathoms, meaning sufficient depth to pass safely.   Along the Mississippi, where shoals shift nightly and light plays in the murky currents, knowing where the bottom lay and how to avoid it separated successful riverboat captains from those wrecked with cargo scattered along the river bank.

And so too goes navigation in the murky waters and shifting currents of the real estate market.  Some of those shoals are represented by Commercial Mortgage Back Securities – a type of mortgage-backed security backed by mortgages on commercial real estate.  These securities represent many single mortgage loans pooled into a single trust which issues a series of bonds of varying yield.  In the last year, the number of distressed resolutions grew to 33%, leaving note holders with 43 cents for every dollar invested.  In 2009, CMBS loss severities rose to 57% and “are expected to remain above the current cumulative average through 2011,” said Fitch managing director Mary MacNeill in early June 2010.  Fitch Ratings expects higher loss severities for all property types this year.   Annual loss severities by property type for last year were 81.9% in Hotel; 58% in Multifamily; 56.9% in Office; 48.8% in Industrial, and 48.2% in Retail and Fitch expects them to be more severe in 2010.

Real estate values are the sounding lines for loss in Commercial Real Estate debt and for the overall real estate economy.  Stressed CMBS resolutions, post deal appraisal reductions and stalling servicer loan modifications mark shallowing water for the real estate economy.   Not until the market gets past this phase of overall value readjustment will it begin to stabilize.   Unfortunately, stabilization means reduced returns for existing investors, but it may mean increasing value confidence for new investors.   Even with a seemingly rebounding economy, unpredictable shoals created by roiling value currents remain in the wake of this massive recession.  Look for the signs of clear sailing to begin in early 2011 – increasing loan modifications, enhanced by the previously mentioned Revenue Procedure-2009-45; stabilizing valuations leading to increasing real estate activity and growing confidence.

We are not there yet.  The good news is that the water is rising.   In time, we will find safe passage.

British Petroleum is dead – deader than a petroleum jellyfish.

Old Ben Franklin had it right when he said “an ounce of prevention is worth a pound of cure” – in fact 95,000 barrels a day of cure.   The BP Oil spill is a perfect example of the idiom at work.  Plainly stated, to have relied on a single blow-out preventer when the well head is a mile below the surface in an environment where no man can go, in water that can freeze gas – well that is a planck weight, a veritable “nano-gram” of prevention, given the risk.   What would the cost of a second or even a third blow-out preventer have added to the cost of this deep ocean well?  In the wake, or should I say plume, of this disaster the cost would have been negligible.

As a result of the uncontrolled spill, BP’s stock plummeted yesterday losing nearly 15 percent of its value on the first trading day since the failure of the “top kill“.  Then it sucked the market down with it as the federal government announced criminal and civil investigations into the spill.  “We will closely examine the actions of those involved in the spill. If we find evidence of illegal behavior, we will be extremely forceful in our response,” said Attorney General Eric Holder in New Orleans.   BP, with an enterprise value of $137 billion, is losing market value with every barrel that emerges from the floor of the Gulf. That loss of market value puts the clean-up and recovery at risk as well as the companies struggle to survive.

So what is the lesson here?   There are certainly many to be learned – chief among them being that one cannot be too careful or take too many precautions when risking something of such enormous value.   Think of your own business and its assets.  Gauge their value to you and your future.  Large or small, it may be hard to imagine losing everything, but then British Petroleum seemed impossible to sink – too big to go bankrupt, fail or be acquired – yet it’s on its way there.

Prevention is not just prevention against disaster – it is prevention against a plume of related consequential costs to your organization and to those that rely on it.  BP is only part owner of the blown well.  Rig operator Transocean and oil services company Halliburton are also involved and, therefore, also at risk.  Cameron Inc., which made the blowout preventer that failed, is also in deep, deep trouble.   Moreover, we are in trouble.  We who rely on the strength of our economy; the health of the environment; the survival of the fishery, and the fitness of mother earth are all at risk.   So when assessing the cost of prevention to your organization in the future and imagining that, perhaps, you can risk taking a chance or two with an important asset – think of British Petroleum.   A desire to cut corners cut the business off at its knees and put our collective future at risk.

A planck weight of prevention is no prevention at all – how about putting a pound of it to work for you? If your cringing at the thought of your own preventive maintenance program, or lack of it, it might be time to get a little more proactive!

Things looked pretty good there for a minute.  Employment was up.  Companies showed profits.  The market rebounded. Summer was on its way.  Things looked good…then, Bang.  Torrential rain, flooding, tornados, Greece, Gulf Oil, Afghanistan, Obama debt, and, to top it all off, a fat-fingered fiduciary falters from figure fatigue and we’re all back in the dumpster.

Fear not ye few, ye happy few.  Consider some inverse aphorisms to help lead you out of the troughs and onto high ground.

Misery Hates Your Company:   Your attitude and demeanor say everything.  If you are a leader, then act like one.  Like the song says, “You’ve got to accentuate the positive.  Eliminate the negative. Latch on to the affirmative.  Don’t mess with Mister In-Between.”  Wear success on your face. Eat positive for dinner.  Breathe optimism.  It’ll go viral.

Early Worms Get the Bird:  And two of those are worth one in the bush.  Feed your birds early and often. Take care of your clients.  Be kinder and gentler than they expect.   Make them too comfortable to move.   Feed them.  Build their nest.   Bring them worms.

Your tenants need your presents more than your presence -   Yes, real estate is a people business, but the people that matter are your clients.  A good property manager is like a good waiter – you get what you need when you need it, but you’re not looking for a personal relationship.

Measure Once, Cut A Lot: Be smart, but be no executioner.  Get rid of the fat, all of it. Yet, remember that your employees drive revenue not the other way around.  It’s twice as expensive to hire effective employees back when you need them.  Cut only where you absolutely must.  Then, see what it got you before cutting again.  Fat is very close to muscle- and remember, that muscle may be your heart.

Invention is the Mother of Necessity:   Innovation is the answer.  Good old-fashioned, hard thinking creativity will help you to create the products and services that your customers-to-be need.   Don’t wait for business to come to you.  Don’t whine about lack of demand.  Create it.

No Man stands still for Time:  Yes, you’ve read that right.  Suck it up and stop waiting for things to get better.  Make them better.   In case you didn’t know it, luck is manufactured.

Good work comes from hard times:  Need I say more?

Remember that failure has many an author, while success is but a lowly orphan.

So get out those adoption papers!

The economy’s health is returning and, like young leaves in springtime, new jobs are beginning to bud.  Yet, the recovering economy is not in steady bloom.  The detritus of a long and blustery economic winter litters the real estate topography, shadowing the sun of increased demand.  The recovery has its good days and its bad days – its strong weeks and its weak ones – like the intermittent cold rainy mornings and warm sunny days we all experience when life returns in April and May.   However, like summer, recovery is inevitable.  Yes I said it, inevitable.   The recovery will happen – faster in some markets, slower in others – but those that prepare for it will prosper first and profit most.

The world of commercial real estate is caught in this seasonal economic struggle- typically two full quarters behind the highs and lows of the broad economy.  Today, cap rates are slowly compressing with perceived property values increasing in advance of any real return in demand.  Businesses are beginning to hire again, but only in certain sectors where growth is fueled by the promise of returning economic health. The blossoms are held back by debt struggles abroad; tragedy in the Gulf and aftermath of a long, dormant economy.

Tight budgets and cold economic winds have forced owners, managers and tenant occupants to use creative survival tactics.   Smart commercial real estate companies are reaching out of the shadows and into the sun with concentrated marketing efforts that flag new and aggressive opportunities for their prospective tenants.   A cost efficient reach into the sunlight through new, web-based identity tools, real estate centered search engine optimization and building awareness tools are an excellent and cost efficient means for supplementing the traditional broker channel.

New economies bear new tools and new methodologies for doing business. Proactive owners fearlessly invest in these ideas, enhancing their assets’ identities and significantly improving the chances of swift and prosperous recovery.   They are leveraging powerful new technologies that have emerged from lean economic times.  The promise of new growth will come to those who act.  Those that wait may confront a late and deadly Frost.

Nature’s first green is gold,
Her hardest hue to hold.
Her early leaf’s a flower;
But only so an hour.
Then leaf subsides to leaf.
So Eden sank to grief,
So dawn goes down to day.
Nothing gold can stay.

Robert Lee Frost

In fishing they call it a feeding frenzy.   It usually starts when a ball of bait fish get caught in predator-made whirlpool – a tuna swirl.  Instinctively, they ball up to mimic a bigger fish, hoping to stave off predators.   Then it happens – one tuna strikes, then another and another until blood colors the water and the news spreads through the synaptic cloud of flesh particles and blood leaving nothing but bubbles, red water and satisfied bellies.  It can also begin with a just a few sharks competing for a single disabled fish.  Instead of waiting for it to lumber to the bottom, they strike early and often in the hope to get control of it while there is still freshness in its flesh.  And when it is over, the benefits extend well beyond the attacking fish.  Particles suspended in the viscous cloud are sustenance to the smaller fish that dart in and out for a piece or two.  What they fail to collect settles to the bottom feeders who gather up the vestiges of the battle.  In the end, the ocean gleams and the ecosystem is rejuvenated as each participant takes its pound, or particle, of flesh.

What works in tuna swirls, also works in the world of real estate.   Swarmed by the predatory fury of Simon Property Group, Vornado Realty Trust and Brookfield Asset Management, the giant General Growth Properties (“GGP”) balled up like baitfish in US Bankruptcy court early this year.  The effort is proving to be little protection as the giant fish begin to swim in and out for the biggest bite.   GGP currently has an interest in over 200 regional shopping malls in 43 states with ownership in many planned community developments and commercial office buildings.  The portfolio comprises some 200 million square feet of retail space and includes over 24,000 retail stores nationwide.   It is, to say the least, a leviathan.

And this leviathan is making a bid to escape with its life.  Backed by three investors in two separate deals – Brookfield, Fairholme Capital Management and Pershing Square Capital Management, GGP seeks to raise over $6 billion.   The combined deal, with some additional debt financing by GGP, will provide needed blood flow of nearly $8 billion, which will energize GGP to eventually emerge from the cloud of bankruptcy with a fin or two intact.

But don’t think this is not a feeding frenzy.   As part of the deal, GGP will issue valuable and lengthy warrants as compensation for the backing to Brookfield – said to be worth some $300 million.  Fairholme and Pershing Have secured other mechanisms and protections to maximize their interest and deal value.   Needless to say, the lawyers and bankers are feeding well too.   Yet the deal is not done and the water still swirls. Simon Property Group, a direct GGP competitor, seeks to acquire GGP with a full, unsolicited $10 billion takeover bite.  It is not happy with the latest cooperative effort.  The Brookfield warrants alone would add hundreds of millions to any takeover price.   GGP rejected Simon’s offer out of hand and the two giants have been snapping at each other ever since.

Add to this a secondary frenzy with Starwood Capital Group, TPG Capital and Five Mile Capital Partners who have thrown $905 million into Extended Stay Hotels Inc. as part of a recapitalization plan.  Also, Apollo Management LP is expected to take control over the real estate assets of Citigroup, Inc.  So the feeders are active.   These aggressive actions are a sign that nourishment has flowed back into the real estate estuary and the cycle is beginning to renew.  No one knows exactly how it will settle out, but all understand that a little flesh in the water is good for the ecosystem.

In his GlobeSt.com blog today, Anthony LoPinto  suggests that based on the hiring activity he sees, while real estate hiring has improved a bit overall, it is still a very difficult job market for new graduates entering the business.  It appears as though hiring managers are opting to hire the over-qualified for entry-level positions to leverage their talent for a year or two and take their chances on a likely departure.  – I am not so sure that is such a sound strategy.

I think the net results of this approach are the following: First, You have hired someone for an important role who has a foot out the door before they have even started.  Second, if this is a wide-spread occurrence, there is a chance that the future talent pool will be degraded for years to come because many young, talented people will have been turned away and taken different career paths.

The landscape has shifted significantly for real estate and property management firms on number of fronts, and hiring is certainly one of them. The BOMA Kingsley report of 2008 focused on the “human capital crisis” in the commercial real estate industry.   While it may appear that the recent economic circumstances have created a situation where a firm has their pick of talented and experienced people to fill available positions, consideration must be given to given to where the generation of future leaders will come from and a strategy put in place for re-stocking the talent pool.

Thought is integral to success.  The old adage “think before you act” isn’t a simplistic prescription for avoiding disaster, it’s a deliberate prescription for success.  Imagine success in advance by thinking through each detail and every milestone of your plan for achieving it.  Discipline your mind to foresee the obvious and hidden pitfalls before taking that first step.  Think of skiers Lindsey Vonn or Bode Miller visualizing their paths to victory in the 2010 Winter Olympics, seeing the turns; the ice; the ruts; the moguls and, hence, the victory.  Imagine Gary Kasparov anticipating his adversary’s moves, four of five moves from his current position.   You may even laugh at Chevy Chase’s credo to “be the ball” – but it speaks directly of the power of thought.

Thought matters.   Take two cases in point:

1. Perennial success story Starbucks Coffee.

In an effort to increase its overall cap value, Starbucks management made some impressive growth predictions in 2004, announcing that it would double its pace of expansion, with a goal of reaching 15,000 stores in the United States.  When gas prices rose and the economy soured, Starbuck’s predicted growth failed to materialize.  In an effort to meet its prediction, management thought to saturate local markets – placing many new locations in the south.  They failed to consider that long, sun-baked lines for hot drinks in plastic cups might not be a great southern business model.  The plan began to founder.   Instead of stopping and analyzing the data, they continued to add new stores each year, even with obvious signs that the strategy wasn’t working.  In the end, Starbucks shuttered hundreds of stores.

2. Compare the fallen Starbucks to the rising fortunes of Sam Zell

Sam Zell, the billionaire investor, made what is universally acknowledged to be one of the best-timed real estate decisions in history.  In 2007, he sold his 573 property; 125 million square foot real estate empire – Equity Office Properties Trust – to Blackstone group and others for $39 billion at the peak of the real estate.  It was one of the largest leveraged buyouts in history.  Zell thought hard about what the market was telling him.  He recognized that real estate values were vastly inflated and that enterprises bought office space based on local differentiators such as price and management, not on national differentiators such as brand name ? EOPs original play.   Zell recognized that lenders were underwriting deals based on unrealistic expectations of increased tenancies.   He knew that the credit balloon had to burst, so he got out before it did.  Yet Sam Zell isn’t perfect.   All that success must have gone to his head.  With his billions he bought the Chicago Tribune – oops.

Thinking long and hard before acting plays well in real estate, and in life.  Starbucks’ actions were not entirely without thought.  It simply failed to stop, wake up and smell the coffee before it acted.

Must have been the caffeine.