The last thing investors in property want is a vacant building. In times like this, when the risk is high, leasing agents need to focus on maintaining the income stream. Flexibility and creativity are crucial, says Howard Morgan
T hey say that if you can remember the 1960s then you weren't there. Unfortunately the same cannot be said about the recession of the early 1990s. If you experienced that recession, like me, you will probably still be carrying the scars. In my case, I still get a sick feeling when I see an empty office building and remember the pain that the property industry experienced as values plummeted and the cost of holding vacant property eroded any prospect of a development profit. Sounds familiar in 2009?
The fact is that you would need to be in the early-to-mid-40s age group to remember that property recession. I would estimate that less than 10% of the fund and asset management community has direct experience of that period. As a result, there is almost a generation of real estate advisers who have spent their entire career in a property bull market and have little or no understanding of the required skills to operate in a recession.
In this article, I will be looking at how asset managers can close the experience gap and suggest some practical ways to increase prospects of leasing and retention success. Here are my practical tips for securing competitive advantage:
1. No excuses. Have your letting or asset strategy meetings become a long list of excuses for why Company A has not taken space in your property or why Company B has quit and that "nothing could have been done to stop them"? The most common excuse put forward by leasing agents and property managers is that "it's the market" and there is nothing that can be done. This mantra is repeated so often that even the most open-minded asset manager begins to find themselves repeating these words in their own board reports.
Excuses are getting more creative. One of our clients was recently told by their letting agent that the reason why their business park was slow to let was because there are too many trees! If you have fallen into this parallel universe, remember that your number one role as an asset manager is to lead the team and encourage success. Can you imagine Manchester United boss Alex Ferguson accepting similarly weak excuses from his players at half time?
2. Get ahead of the declining market. One of the fundamental lessons of the recession of the early 1990s was that the property owners and investors that reacted quickly to changing times by lowering rents, introducing incentives and offering flexible leases were able to win occupiers ahead of those who stuck to the "it's a great building and we will be patient" school of thinking. I recall that we let a 15,000m2 second-hand office building before the leasing brochure was even printed in 1992, by doing just that. This is a time to change your mindset from the boom view of life that "it will get better if we wait", to the view that it can (and probably will) only get worse. While this sounds bleak, you will feel a lot better when your property is leased and income producing than still empty with soaring holding costs.
3. Retention , retention, retention. Retaining existing cash flow is the best strategy to protect property returns today. In good times, it seems rational to delegate property management to a third party and for asset managers to concentrate their time on investment acquisitions and disposals.
Property management may not be glamorous but the difference between good and bad property management could be the difference between a well-secured income and an expensive letting void. As an example, our own consulting business recently moved offices, attracted by the availability of more space for less money in a nearby office building. We were propelled to move by our frustration at the ways our property was managed and the unwillingness of our landlord to recognise that occupiers will move if you do not give them a reason to stay. Are you performance managing your managing agents? If not, how can you be sure that they are doing all they can to build relationships and retain cash flow?
4. The science of leasing. The great golfer Gary Player said that the "more I practice the luckier I get" and the same can be said of leasing. In leasing, there is a direct relationship between the effort you invest into placing your property in front of prospective occupiers and how quickly it will let. One lesson of the last recession is that the more sales leads that you are following up at any one time, the better.
The concept of waiting for the "one perfect occupier" is wishful thinking. The chances are they will be taken by a competitor before you even get the chance to pitch. We are working with a number of clients on an approach we call performance leasing. This approach involves working with the client and leasing team to build a precise plan of leasing activity, down to the number of viewings required each week to secure, given likely conversion rates, the number of lettings required. By using this method to monitor progress on a weekly basis, we can see if the leasing team is on or off course and take appropriate action. Relying on the traditional monthly letting meeting is the equivalent of trying to navigate a cruise ship around the world by setting the compass bearing once a month.
5. Information is power. My final lesson from the recession of the early 1990s is that information is power and that the organisation that has the best database of contacts will outperform its peers. For example, do you have access to a list of all companies with lease expiries or break options within the next 18 months within your target catchment area? Do you know what happens to the leasing enquiries that mysteriously drop off the monthly letting schedule?
We have identified through our own work with clients that all too often these enquiries are not "lost enquiries" at all but just waiting to be approached by a landlord who is willing to explore their requirements in a creative way.
My message to asset managers is simple - get the best skills on your team and you will be one big step ahead of your competitors.
Howard Morgan is managing director of consultancy RealService