Building & Facilities Operations

You heard it here first folks, the New England Patriots will win the super bowl this year…at least if historic Commercial Office Vacancy Rates have anything to say about it.

According to Bizmology, Jones Lang LaSalle claims that NFL teams are two-thirds more likely to win the Super Bowl if they are based in cities with a high percentage of empty office space. So while a city’s real estate may be depressed, it’s sports fans won’t be.

Just remember when making your winning pick this Sunday that commercial office vacancy rates are lower and have decreased in greater New York in Q4 2011 compared to the increased rate in Greater Boston. Oh, and I would also factor in Tom Brady’s knack for winning and perfect spiral too!

Go Pats!!

The possibility of a new trend has surfaced in the housing market: the management of college dorms by private companies. Until recently, the job of on-campus housing maintenance fell directly on the university. This could all change.

According to the Wall Street Journal, The University of Kentucky has been discussing the possibility of turning over all on-campus management and maintenance responsibilities to realty group, EDR. Currently, the university wants to increase the size within the next ten years, and would turn all responsibility of this task to EDR. Their responsibilities would include replacing most of the 6,000 beds now a part of Kentucky’s housing program, as well as adding another 3,000 beds over the next ten years. This marks the first time a university would completely turn over housing management and expansion to the private sector.

In order to update the number of beds on campus, EDR would be required to construct new buildings. Normally this would involve erecting new buildings on campus, but EDR has different plans. They intend to tear down existing buildings and replace them with upgraded, larger dormitories. In doing so, the total number of beds on campus would actually  increase each year.

This plays an important role in this new market. Losing beds poses a threat to universities as many schools struggle to house everyone already enrolled. Upgrades would be necessary, and there so would spending money. EDR has already stated that they may spend as much as $500 million on the total renovation project.

Managing all on-campus housing comes with its downsides as well. Universities are in session nine months out of the year. Having students living on campus poses issues to a company attempting to renovate a large number of buildings. This means that management companies would need to find a place to house students while they renovate certain dorms. Considering their plans to start construction on a 600-bed facility sometime in April of this year, EDR seems to have found a way around this dilemma, assuming they win Kentucky’s housing contract.

BlueGreen is one of my favorite colors clients. A world-class resort, BlueGreen (NYSE: BXG) operates a little differently than our core of Corporate Real Estate clients. Their idea of tenant satisfaction is installing a 75,000 square-foot pool oasis.

BlueGreen’s specialized industry of leisure and tropical escape required a flexible approach. You see, rigidity and structural confinement are generally seen as antithetical to the resort culture, especially when their slogan is “Colorful Places to Live and Play.” The resort’s unique needs prompted us to rethink our platform’s capabilities.

A client of ours since November 2009, BlueGreen has worked with us to develop a creative property management solution. Here are some of the ways they have optimized the flexibility of the platform:

They have thought outside the sand box in terms of their “Buildings.” In their account, a pool, playground, grill area, or any common area is considered a building, with its own work orders and scheduled PMs. This helps them gain accurate reporting around where the highest demands are. (They are generally wherever the highest concentration of New Jersey vacationers are.)

“Tenants” are essentially room numbers. They have a very specific work order issue list that they use to gain accurate reporting as to the types of issues being reported in their rooms. E.g. “Too much foam in my chocolate hazelccino” or “There is an alligator in my villa.”

Given the size of the resort, the mobile application has become crucial to improving productivity and time management across 54 acres of serene setting. The engineers in the field are able to track, comment, and close work orders without having to return to a computer and spend time closing out the work they have done. More time for the H2O arcade and bar.

You know, I think it’s time for an on-property meeting…

We were very pleased this week to announce our new partnership with eSight Energy! eSight Energy is the creator of eSight, the world’s most sophisticated and comprehensive energy management suite. Utilizing 100% web-enabled technology, eSight offers an extensive range of techniques for analyzing energy usage and targeting sites for significant energy and cost savings.

This partnership will provide Building Engine’s real estate management customers with the ability to measure, track, and act on energy related information. The integrated system will monitor energy usage, provide alerts and work flow tools, allowing users to make fuel-saving adjustments, reduce areas of energy waste and reduce overall consumption.

This effort was driven by our customer’s feedback that energy management is a current and long-term priority for them. Additionally, they saw direct value in an integrated offering that utilized their employee’s daily usage of the Building Engines operation platform and data collection, workflow and communications capabilities.  We are pleased to be working with such a great partner and taking the first steps toward helping our clients in this area of their business.

Learn More about making energy data actionable – Proactive Energy Management: Making Data Actionable

As National Preparedness month continues across the country, property owners and managers follow guidance and suggested best practices delivered thru top 10 lists from partners like Building Engines (10 Best Practice Points for Property Team Preparedness) or BOMA (Preparedness Top Ten List for National Preparedness Month.) The question is, who is preparing adequately for the Black Swan Event?

In his 2009 book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb, the author makes the case that business owners and risk managers place too much weight on the odds that past events will repeat.  Instead, the really important events are rare and unpredictable. He calls them Black Swans, which is a reference to a 17th century philosophical thought experiment. Nassim argues that most of the really big events in our world are rare and unpredictable, and therefore, trying to extract generalized stories to explain them may be emotionally satisfying, but it’s practically useless.

In an October 2009 Harvard Business Review article entitled The Six Mistakes Executives Make in Risk Management,  Nassim and his co-authors summarize the primary points of his book and their research in the following manner-

Six critical mistakes that many executives and risk management professionals make in risk management:

1.       We think we can manage risk by predicting extreme events

2.       We are convinced that studying the past will help us manage risk

3.       We don’t listen to advice about what we shouldn’t do

4.       We assume that risk can be measured by standard deviation

5.       We don’t appreciate that what is mathematically equivalent isn’t psychologically so

6.       We are taught that efficiency and maximizing shareholder value don’t tolerate redundancy

They continue by presenting 6 answers or solutions to those mistakes:

1.       Instead of calculating the odds of whether things will happen, rather think about what you will do if they do happen (This is your response planning!). People who can handle one type of crisis, always have the potential to handle many types of crises.

2.       Hindsight can never be converted into foresight. Lessons should be learned from the past, yes, but the past should not be used to predict the future.

3.       A dollar not lost is a dollar earned, and preventing losses is perhaps a better strategy than gaining profits, and risk management activities are in fact profit-generating activities. There is no separation.

4.       Statistics is a complicated science and the often cited standard deviation is not average variation, but the square root of average squared variations. Although in a perfect world of randomness, most events fall within the -1 and +1 standard deviation, in real life (“Black Swan”), movements can easily exceed 10, 20 or 30 standard deviations. (…This is what your real exposure can be.)

5.       In absolute quantified numbers, two events may be equal, but subjectively, in a group of people, the same event may have very different value to each of them and may be understood entirely differently.  After all, number are just numbers, feelings, values, and risk acceptance are not so uniform. (…This is the real risk to your business.)

6.       Optimization of processes makes them vulnerable to changes, but robust processes can survive change.

There are no shortage of Black Swan events we can point from the past decade that have impacted the real estate ownership and management community.  Make sure that you give some thought to how you can apply some of these principles to your risk management plan during National Preparedness month.

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?

“Try again. Fail again. Fail better.’ ~Samuel Beckett

While I don’t think the Irish writer and poet ever owned or managed commercial property, you can certainly apply his quote to what we all do in the course of running our businesses or doing our jobs.

This may be especially true now, given what the industry and economy in general have been through over the past few years. There have been some spectacular failures (Bedford-Stuyvesant anyone?).  But, there are also those who have weathered the storm well, such as Normandy Real Estate, and many signs of life are rising from the ashes and companies are trying different approaches to partnerships, financing, filling space, manage operations, etc.   In other words, “trying again.”  Not all of these attempts will be successful, the “Fail Better” part, but what are the alternatives?  This is what we do.  We move on, we try again, we fail again, we get better.

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.

You request them from your tenants and your vendors.  You look quizzically at them when they arrive on your desk.  Your boss asks you to make sure that they are current and valid.  You file them away and hope that you remember to ask for them next year when they renew.  You purchase access to systems that help you to ensure that they are current, maintain renewals, and organize and store them efficiently.  All the while you wonder, “Why is a Certificate of Insurance so important to my company, my boss, and to my job?”

A Certificate of Insurance (better known as a “COI”) is a snap shot of the holder’s current insurance coverage at the point in time it is issued.  It lists all points of coverage including additional insureds – named parties who are covered by the policy, but are not the original holder of the policy.  By the way, that’s you.

Your real estate management company must be a named as an additional insured on all of your tenant and service company insurance contracts in order to protect your organization against risk and liability created by the negligent acts of your tenants, employees or service providers.  Additionally, that change to their policies must be endorsed by the covering insurers.   Not only does this effectively spread the risk to your organization and its insurer, it ensures that when things go badly on your property due to the negligent actions of your tenants, their visitors, or your service providers, your organization enjoys the same protections provided to them by their insurance companies.

Here are the top 10 secrets to better COI Management:

1. Request a valid Certificate of Insurance from each tenant and vendor that shows your organization named as an additional insured.  Then, make sure that you get it.  Send them an example certificate so that there is no confusion.
2. Formally request that your organization be added as an “additional insured” on all of your tenant and vendor’s general liability insurance policies.  Check the spelling of your company name carefully when you get the COI.
3. Read the coverage limits on the COI to make sure that they comport with the insurance coverage requirements of your leases with your tenants and all service contracts executed with your vendors.
4. Request changes to coverage limits if they do not meet the minimum requirements outlined in your own contracts and leases.
5. Ensure that the tenant or vendor’s insurance company has actually endorsed the addition of your company as an additional insured.  A COI is not an endorsement, so check the policy and get a copy of the endorsement from time to time.
6. Read the endorsement carefully, particularly any amendments of exclusions noted on the endorsement or COI that change the coverage provided by the GL policy.
7. Record the coverage period for each policy as expressed on the Certificate of Insurance and set a reminder in Outlook, your Operations Management System, or your PDA well in advance of the renewal date to make sure that you request an updated COI each year.
8. Check any changes to required limits of coverage annually – both to your own policy and your tenant and vendor policies.
9. Send copies of all certificates (in electronic format) to your insurance agent and to your insurance company.
10. Purchase an effective web-based operations management system with a certificate of insurance tracking program to help you to effectively manage this process. Click here for more information.