Building & Facilities Operations

Under the version three LEED (Leadership in Environmental Engineering and Design) standards, the Green Building Certification Institute assumed administration of LEED certification for all commercial buildings.  LEED for Existing Buildings (”LEED-EB”) employs sustainable performance standards to measure an existing building’s environmental impact and outlines means for reducing those impacts over time.  The LEED for EB Rating System helps building owners and managers measure operations improvements and maintenance on a consistent scale with the goal of optimizing operational efficiency and, hence, minimizing adverse impacts on the environment.

In the past, most LEED rating systems required a high building occupancy to warrant a rating – 75% – an argument founded on the idea that under-occupied buildings would earn an unrealistic score on what are critical scoring attributes.  Among these attributes are: operating costs; waste sent to landfills; energy and water usage; and greenhouse gas emissions – all of which would be reduced in a lower occupancy environment.  LEED for Existing Buildings addresses whole-building cleaning and maintenance issues, so the entire building is considered part of teh examination process.  The unintended consequence of the high occupancy requirement was to disqualify and eventually discourage a high number of properties from pursuing LEED certification, a concept anathema to the intent of LEED certification.

Finding this unintended consequence untenable, the LEED Steering Committee recently approved a change to the Minimum Program Requirements for LEED for Existing Buildings lowering the occupancy rate required for certification from 75% to 50% occupancy.  The US Green Building Council staff and LEED committee members have confirmed that the occupancy reduction does not undermine the technical integrity of LEED for Existing Buildings.  The hope is that more buildings will take on LEED certification, even in a struggling economy.

For guidance on how LEED for Existing Buildings projects can demonstrate compliance with the minimum occupancy requirement click here. To access an informative microsite detailing how to properly gain LEED certification for existing buildings, register here.

The idea that everyone is on average approximately six steps away from any other person on earth, is known as six degrees of separation – such that a chain of “friend of a friends”  will connect any two people in the world within six steps or fewer.   In Hollywood, this small world phenomenon is embodied by Kevin Bacon, where any actor can be linked to Mr. Bacon within six film roles or less – or so goes the theory.

Translating this “small world phenomenon” to the ”small market phenomenon” of real estate – every facet of the market is on average approximately six or less steps away from effecting any other facet of the market – positively or negatively. It’s my theory that home sales and housing starts are the Kevin Bacon of real estate value.

Let’s start with capitalization rate – the true expression of real estate value in the distant realm of commercial real estate. A “cap rate” is the mathematical relationship between net operating income (“NOI” – all revenues derived from a real estate asset less the costs of maintaining that asset) and asset value. It is a historical value – extracted from sales of real estate of a particular class within a market place and derived from the formula – NOI ¸ Value = Cap Rate. To simplify the concept, let’s assume that an asset throws off $25,000 per year and is valued at $350,000 – it has a cap rate of slightly more than 7%.   So NOI, Value and Cap Rate lie in close proximity to each other with a change in one, certainly affecting the other.

Add to this mix the fact that Net Operating Income includes rental income from commercial leases.  The 2008 financial meltdown forced massive layoffs as companies struggled to repair their balance sheets.  Fewer jobs meant fewer dollars available to pay home mortgages.  This fact, combined with plummeting home values caused home buyers to balk, homeowners to default and the overall economy to hiccup.  Commercial financing became impossible to find, driving down asset values and destabilizing commercial rents.  Hence a decline in home sales, (1) caused by depressed home values and home owner to default, (3) made financing impossible to find, (4) resulting in massive layoffs, (5) declining net operating income, and (6) the consequential compression of capitalization rates.

As a trailing indicator, real estate activity is the last to emerge from a financial decline.   With new home prices starting to plummet once again and mortgage interest rates rising, there is little hope for the housing market to pick up in the near term, despite a correcting economy.  This spells trouble for the commercial real estate sector with home sales and housing at the center of the real estate value fray.  Bad news, like water, finds its way through everything – even bricks and mortar.  I wonder if Kevin Bacon is selling.

Imagine buying a sick race horse for cheap hoping that over time she might squeeze in a few more paydays before heading to the glue factory – enough paydays to pay the purchase price and turn a tidy purse.  In the horse race of mortgage finance, that filly is named “Toxic Asset” and she’s a mudder through and through.

When you look into the manure pile of residential mortgages sold, resold and sold again over the last few years, it‘s enough to make you gag and turn away in horror.  Toxic Assets in the mortgage realm are packages of delinquent mortgages (bonds) – a sour amalgam of overvalued property loans whose loan-to-value ratio is so out of whack that there is no longer a functioning market for their sale. On their face, these mortgages might have turned a substantial payday, but that was back when unemployment was  a colt and a fading pulse could field a mortgage Jockey.  Now, with two-year old mansions out to pasture and money tighter than a Pelosi smile, those same mortgages have been scratched.   No longer race worthy, they’ve become toxic, but that doesn’t mean they won’t run.   A bunch of smart guys parlayed these broken down roans and packaged them into bonds, some of which are foaled into separate offerings and handicapped at different rates.   Banks play the bookmakers and sell them to willing bidders who wager that their Toxic Asset will explode out of the chute and out run the purchase price before collapsing.   While most end in a dead heat, a few hit the Trifecta.

Many of the loans that make up these assets are the subject of what is known as a strategic default or withering payment – a condition where the original borrower has decided that he is so far underwater (his debt exceeds the total asset value) that it would be stupid to continuing paying the debt service on that asset.  He plans to default or to pay only a small portion of the monthly mortgage payment.   Here’s where the connection to you and the real estate market begins.  The more confidence a delinquent mortgage holder has that his mortgage is a mudder and may be salvageable, the more expensive that toxic asset will become – expensive because the likelihood that it will pay out is far greater.   So, while expensive, those assets are also more likely to win, place or show.  That’s the turn and the stakes are high.   Once a toxic asset becomes toxic, it can’t go back to being a healthy asset again.  Instead, the investor rides it out hoping for a long and potentially lucrative death.

So the Toxicity Derby is a true gauge of market health.   When bookmaking banks holding toxic assets are unwilling to accept significant price reductions for their toxic assets, buyers baulk, demand decreases and no one runs.  Hence, the turf is frozen.  But when confidence returns, values rise and with them demand for the Dark Horses – Toxic Assets.   In this way, they are the primordial stuff of recovery – the putrid goo from which true recovery evolves.   So keep your eye on the Toxicity Derby.  It may the true indicator of overall recovery.

Your real estate management business can learn a lot from a cat.    We all know about a cat’s innate ability to always…. always land on its feet, but do we know how a cat does it?

Here’s how:

It starts at the head.  Utilizing its inner ear, a cat first orients itself to the ground.  Imagine a dismounting gymnast first finding, and then fixing her eyes on the ground as her body twists above her.  With split-second timing, the cat then tucks its front legs inwards to reduce the moment of inertia at the head while extending its rear legs to increase the moment of inertia at the tail.  This gives it the necessary mid-air purchase to rotate aggressively without touching a fixed object.   Depending on the cat’s flexibility and initial angular momentum, it may need to repeat the tuck, thrust and roll technique a few times to complete a full 180° rotation – all instantaneously.   Finally, a cat sets its feet on a parallel plane beneath its chest, relaxing its leg muscles and exhaling to soften the coming landing.  An unusually flexible backbone, loose skin, a prehensile tail and no functional collarbone contribute to the cat’s ability to land upright ? a survival anatomy and instinct borne of millennia of threats.  It’s an instinctive trick – coming naturally in their first few weeks and perfected by the seventh.

Brilliant!   Eat your heart out Olga Korbet and Nadia Comaneci.

So how does feline finesse lend itself to real estate recovery?

Here’s how.

1. First, use your business inner ear to orient your organization towards the ground, and towards recovery.  Like a cat, fix your business vision on organizational success and keep it there while your company tucks, thrusts and rolls to right itself.   Know where you are going to land because in knowing, you will have aligned all of your actions towards a singular goal and you’ll have the confidence and comfort that comes with expectation.
2. Next, find some midair purchase.  Look for a component of your enterprise upon which you can build towards recovery.   While the balance of your organization is struggling with gravity, focus and build off of the inertia created by the grounded portion – your existing tenants and your existing assets.  Focus respectively on their happiness and condition.  Invest in their future and by doing so you invest in your own.
3. Finally, get ready to land right and land well.   When the business starts coming around, you must be ready to hit the ground running.  Don’t wait for the recovery to happen to get ready.  Keep your organization flexible enough to absorb the blow and then pounce on new opportunities.

Your business has the necessary anatomy to make the turn and land on its proverbial feet.   With leadership, vision and flexibility your real estate management business will recover.  It starts at the head.

I just read that the U.S. office market recovery has begun:

“…that the third quarter the U.S. office market posted positive net absorption for the second consecutive quarter — 5 million square feet absorbed in the second quarter and 7 million square feet in third quarter.” [U.S. Office Market Enters Early Recovery as Absorption, Demand Point Up, Vacancy Turns Corner].

While these are small numbers, they are welcome moisture to a desiccated market.

In the same digital breath, however, Co-Star’s Group’s 2010 Third Quarter Office Review said that “the national office market won’t begin seeing rental rate increases for another three or four quarters or net operating income increases for another four to six quarters.  That means rents won’t start increasing until well into 2011 and net operating income increases will have to wait until 2012.

In the lexicon of Bill Belichick – “that is bulletin board material”.

I think that the experts have it backwards.  Surely, office rental rates will remain flat for a while, but it will be far longer than a few quarters.   Office buildings in 79 metropolitan areas lost 1.9 million square feet of occupied space in the third quarter or 2010, pushing the national office vacancy rate to 17.5%, the highest level since 1993, or so says Anton Troianovski, of the Wall Street Journal in his October 5^th, 2010 article – Signs of Recovery for the Office Market. While economists agree that office vacancies will not reach their record 1992 high of nearly 19%, the recovery will certainly be long and rental rates will remain depressed.  I contend that those rental rates will remain well below their high for another two to three years as corporate recovery fills existing shadow space; 2009 and 2010 leases run their fully renegotiated course; employment begins, or struggles, to recover, and the market absorbs what is a massive inventory of newly constructed space.  Other factors will contribute to the length of recovery, such as changes in workplace design and the growth in popularity of outsourcing and virtual officing.    So, even with the recovery, things look bad for near-term rental rate recovery.

The same is not true for Net Operating Incomes.

The financial downdraft created by the current economy is beginning to change office management attitudes and practices.  The advent of long-term negative growth has shifted management focus back to asset quality and condition as well as towards renewed and better capital planning.  The commercial property management market has become far more comfortable with the “Cloud” and new technologies it provides have allowed progressive real estate managers to see more, to measure more; to manage more successfully, and marshal assets and resources more economically – more intelligently than ever before.   The Cloud makes managers look smarter – be smarter.   Improved visibility into property condition and asset-related activities provides management with enhanced decision-making power and greater revenue producing opportunities than ever before – yielding ever-increasing NOI.

The “Moore’s Law” of real estate management is that a real estate manager’s awareness and use of technology is growing exponentially – and from my limited perch, I’ve seen it double year-to-year.   The more technology a manager uses, the more visibility that manager achieves.  Visibility translates into efficiency which begets dollars per square foot.  Better managed buildings with professional systems and automated services keep tenants happier (retention) and attract new tenants to available space.   While property management dollars are not necessarily in the same order of magnitude as transactional dollars, they are dollars nonetheless.  A dollar saved is another dollar competing for sunlight on the bottom line.

So, I am encouraged by the new focus on management through technology.  It is a healthy change for what had become an old and staid market space. Simply said – quarter-to-quarter, clicks are driving bricks and mortar.

The real estate optimist, like Sasquatch and the honest politician, may be no more than myth.  Real estate runs on jobs and jobs are a reflection of the economy.  With the U.S. economy growing at an annualized rate just 1.7 percent in the second quarter, we appear to be entering another sustained slowdown, or so claims the Federal Reserve.   The loss of 8.4 million jobs caused by the recession has crushed consumer confidence and overall spending.  The housing market cannot muster sustained growth in the absence of a government buyer tax credits.  In a business fueled by jobs, the real estate market appears to be weaker than stone soup.

Enter Bill McCall, founder of McCall & Almy, and member of the “Legends” panel at the BisNow Breakfast at the Copley Marriott.   Among a gathering of over one thousand Boston real estate professionals, McCall, sounding very positive, rhetorically asked (paraphrasing here) what business allows you to turn over your business every three years or so and renew it at market rates?   Smiling, he noted that while the real estate market is unhealthy at current growth rates, at a 3-5% growth rate it is quite healthy indeed.  He confidently stated that we would certainly be at those rates again.   Now that is optimism!   Funny, however, that McCall would make such claims while telling the huddled masses that our local hospitals are tabling development plans altogether – a sure sign of a sustained downturn, but I digress.

Most of us are confused.   Are all things real estate good, or are they bad?   Are they bad now and soon to be good again?  Are those real estate good times inevitable?

I recently spoke with another unnamed Boston lion of real estate finance who told me in no uncertain terms that Route 495 real estate was dead and deteriorating.   There are a few exceptions, such as Westborough Office Park, which is near route 90, but there are not many.   In making this claim, he noted that while the need for commercial space will certainly grow in the future, the economic climate has so paralyzed real estate owners that it will be difficult, if not impossible, for them to hold and manage existing empty space for the long term.   Noting that the need for office space will likely return in late 2011 and early 2012, the inventory of shadow space is so great that it will absorb demand for another year or more – extending the new space drought well into the new millennium.   New Millennium!   Forget about new construction!  Ouch!

So what should a real estate owner do about what appears to be a Paleolithic diet of good news.    I say “put all of your eggs in one basket and watch that basket.” Specifically:

1. Focus on what you’ve got and work hard to make it operate as efficiently as possible.
2. Be creative about renewing your tenancies.  A bird in hand is worth…..well you know.   A tenant who pays a lower rate for a longer term is better than no tenant at all.
3. Focus on net operating income.  Divine a financial plan imbued with the reality of long term high unemployment and zero tenancy growth.   Do not wait for that 5%.
4. Build cash wherever and whenever possible.
5. Invest in effective systems and good people to run them.

Finally, remember the three rules of real estate management – measure, measure and measure again.

You start a return on investment (ROI) analysis with your friendly software vendor.  Exploring every recess of the application, you map it to your business processes, and analyze the relative cost and return it will have on multiple business units.  You discount the resulting values, which, when adjusted, demonstrate that your organization will experience a 135% return on your initial investment within the first year.   So you wrap up the story in a twelve point PowerPoint presentation with accompanying spreadsheets and pivot tables and deliver it to your decision-team in a compelling Monday morning session.  You give it a strong “buy” recommendation.   Decision made, you deliver the joyful news to your vendor, deployment begins and you move on to your next challenge, happy in the knowledge that you have done your homework and delivered the right solution to your business.

A year and seventeen projects later, you’ve forgotten all about that ROI exercise.  The relative impact of that enterprise application can be summed up in two words – “What application?”

To be successful, enterprise level software applications must become integral to the business practice – doing what all great enterprise software systems do: automate business processes, support information flow and reinforce business standards organization wide.   Enterprise acceptance of the application is critical to achieving that goal.   Acceptance is a function of mastery and usage and must take the “human” into account.   Humans require regular training and retraining to achieve mastery.  Hence, mastery depends equally upon the excellence of supporting service as it does on the design the software itself.   This is particularly true when the application they use changes with the business; with the market, and with available technologies.

Humans also require regular reinforcement, reminders and best practice information to broaden usage.  On average only 10% of available application functionality is used by any one user.  Understanding this fact is key to your success.  Humans require support, not the software.   Like muscle memory with repetitive motion, application memory comes only through repetitive, reinforced usage – usage achieved through programs to ensure application immersion,  broad comprehension, concept freshness and best practice awareness.   All of the effort that goes into assessing whether a system is right for your business will be wasted if that system does achieve broad organization acceptance and usage persistence.

Here are ten keys to achieving acceptance and usage persistence:

1.       Analyze the quality of the service underlying the software.

2.      Remind yourself that the functionality is secondary.

3.      Do your reference checking early.

4.      Make an ongoing plan to ensure ongoing service.

5.      Ease into it:  Garden hose, not fire hose.

6.      Establish performance metrics and revisit them regularly and keep revisiting them.

7.      Give your provider active feedback and keep giving them feedback.

8.      Involve key departmental constituents in all phases of the process.  Keep them involved in your regular reviews.

9.      Make a strategic decision – not an operational decision.  Management buy-in and ongoing support is a must.

10.    Go SaaS.

What embodies risk within your real estate portfolio?  Is it the damage that could be caused by water, mold, wind, rain, or aging?   Is it a slip, a trip, or a fall?   Is it a prolonged elevator entrapment; a disgruntled tenant employee who acts out; a media blitz on your building, or a public demonstration?  Is it the failure to have valid insurance protection in place through your tenants and vendors?   Risk transforms to damage and costly repairs or claims.  Litigation is costly, both from an insurance and time perspective.

Do not wait to react.  Be proactive and follow these ten simple best practice points for risk reduction and preparedness.

1.      Assemble a Response Team:  Make sure that you have ownership and management representation on that team.  It should include some risk and liability expertise and remember to think outside of the building – e.g. the Government is a critical part of your team, as are fire, police and the local Department of Health.

2.      Outline Key Risks in Advance:   Remember that threat levels are unique to each building.  Think through what might happen to your building before it happens.  Get experts involved to help you see what you cannot.  Look at historic data to help your recognize likely events and insure your greatest areas of risk.

3.      Create A Response Plan: Write it down and publish it to those that should know. Match your risk to your response team.  Train backup employees to perform emergency tasks.  Create a business continuity plan – Make sure you tenants have a continuity plan.  Determine offsite crisis meeting places.  Test your plan to reveal and accommodate changes

4.      Run simulations:  Make sure that all employees-as well as executives-are involved in the exercises.   Practice crisis communication (employees, customers and the outside world).  Invest in an alternate means of communication.  Form partnerships with local emergency response groups.  Evaluate your performance – Continuity exercises should reveal weaknesses.

5.      Focus on Responsiveness:  Most claims result from failed responsiveness.  Put the right assets in place so that you can respond quickly.   Redundancy is key to reliability and response.  Immediate response enables real time advice, real time reaction and injury or damage mitigation.

6.      Capture all Relevant Data:  Data and information is your best defense.  Only with data can you make informed decisions.  Train you teams to identify incidents and record them.  Keep Data up-to-date and available.  Make it accessible from anywhere so that you can retrieve it quickly when needed.

7.      Leverage Technology:  Responsiveness relies on information and speed.   Redundant systems prevent data gathering and communications failure.  Establish preset response protocols for every situation.  Build your Response Team and your Response Plan into the technology.  Keep contact information up to date.  Go mobile while leveraging multiple communications points.

8.      Train Your Team and Analyze Your Response: Three rules of Team Preparedness = Practice, Practice, Practice.  Do a post mortem analysis of every incident.  Look for trends and opportunities.  Adjust your Response Team and Plan to fit the building risk profile.

9.      Involve Local Teams and Authorities: Police, Fire, DHS and DHLS are key partners in any response.  Relationships are critical to responsiveness.  Imagine calling your local Fire Department and the Chief knows who you are. Know your neighbors so that they know you.  Have regular meetings with Response Teams in adjacent buildings.

10.  Keep it current: Take your partners, colleagues and neighbors to lunch once a year. Review your plan annually. Practice regularly.  Never stop testing or improving your plans, practices and procedures and the technologies that support them.

The Green Movement in Real Estate is growing darker.  All new certification schemes, like all new growth, have that light green tinge when they begin that denotes suppleness. While it makes them amendable to change, it provides little armor when the going gets tough.  As a result, many rating systems mature to a darker shade.

The USGBC’s LEED rating system is by far the most recognized and most used green building rating system in the world and the UK’s Building Research Establishment Environmental Assessment Method (BREEAM) is frequently used in Europe.   As standards like LEED and BREEAM mature, that light hue darkens to a more serious and robust one – characteristic of maturity and staying power.  According to Pike Research, that day has come.

Pike projects that by 2020, 53 billion square feet of space worldwide will hold some type of green building certification, up from 6 billion this year, and 73 percent of green-certified building space is in a commercial building – a number expected to grow to 80 percent by 2020.   The majority of green certifications will be held by existing buildings instead of new construction, the report says.  One American Row in Hartford, CT recently obtained Leadership in Energy and Environmental Design for Existing Buildings Silver status, making it one of the few LEED-EB certified buildings also listed on the National Register of Historic Places.

The bigger question is how a building maintains LEED certification status once it has achieved it.   Without a comprehensive scheme for posting and managing LEED related tasks – the lifeblood required to sustain any certification level – that LEED or Green status will fade to brown and join the detritus of other failed programs.  Technology – operations management systems that post and sustain LEED related tasks throughout the year are integral to maintaining LEED status.  Keeping it Green and maintaining affordability requires energy and organization as well as robust data collection, communications and reporting.  Think of these systems as the arterial system for your LEED targeted building management practice.

Without one, your LEED status will die on the vine.

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.