Addressing High Property Management Costs in Commercial Real Estate
A big concern for those who invest in or own commercial real estate is high property management costs. When we talk about high property management costs, we are essentially talking about things such as rising expenses, inefficiencies in management operations and challenges regarding maintaining a diverse portfolio. All of the above make it difficult to generate a profit so they are all things that commercial real estate investors and owners want to avoid.
Let’s take a look in more detail of what some of the key drivers that contribute to high property management costs are:
Labor costs: When there is a competitive market, the costs for wages for skilled property managers, maintenance staff and other essential members of staff have been on the rise.
Technology gaps: Many property management companies are still relying on processes and technology that is out of date. While they may think it is expensive to invest in technology, they are actually massively limiting the finances that they could generate, as this causes inefficient workflow.
Compliance and Regulatory Burdens: Commercial properties often need to comply with regulations related to safety. These include environmental and accessibility costs which take money from investors and owners.
Energy and Utility Costs: With energy costs increasing (particularly for old building without efficient systems in place) expenses for utility costs are becoming a massive burden on property owners.
Now that we have looked at some of the key drivers behind property management costs, we need to understand them.
Commercial real estate projects tend to be managed through a combination of in-house staff or outsourced property management companies. These services include things like rent collection, maintenance building, relationships with tenants and compliance with local laws and safety standards, and financial reporting.
In an ideal scenario, the management costs would be as small as possible, taking somewhere between 3-5% depending on factors such as size of property, location and the complexity of the property. However, for some this small percentage is a long way off what they are actually paying, with many investors reporting upwards of 10% of their gross income being used to pay property management costs.
Investors typically aim to reduce operating costs to boost profitability but maintaining a balance between cost-cutting and service quality is a critical challenge. Cutting corners in property management can lead to dissatisfied tenants, higher vacancy rates, and a decline in property value.
What are some Solutions for reducing these costs?
It may be disheartening to see such high property management costs but we solutions that you can put in place to keep these costs to a minimum.
- Leverage Technology for Efficiency
One of the main contributors to high management costs is an inefficient way of working as a result of outdated processes. By implementing modern property management software and technology into your business model, owners and managers can work more efficiently, reducing labour costs and improving response times.
Automation: Automate repetitive tasks such as rent collection, tenant communication and maintenance scheduling can be handled by a property management platform which offers an all-in-one solution for handling these tasks. This reduces the need for multiple members of staff and reduces costs needed for staff wages.
Data Analytics: By using data analytics, you can measure operational performance, tenant behaviour and occupancy trends. This will help to predict maintenance needs, optimize energy usage and identity any ways you can reduce costs.
Smart Building Technology: By investing in smart building systems such as automated HVAC, lighting and security systems, you can significantly reduce your energy costs, prevent unnecessary repairs and improve building efficiency.
- Outsource Selective Functions:
Outsourcing certain functions to third-party providers who specialise in that area can help you to save money in the long run. Rather than you dealing with these tasks yourself, consider outsourcing high-cost areas such as legal compliance, energy management and very specific tasks to vendors who are able to offer better economies of scale.
Vendor Management: Rather than a large in-house team of maintenance professionals, you could opt to develop a network of reliable vendors who can offer services at a lower cost. You can also use competitive bidding to negotiate better rates. Both will help you to reduce maintenance costs.
- Invest in Preventive Maintenance
Reactive repairs are far more expensive than preventive maintenance. Be pro-active! Establishing a maintenance schedule with a well-structured routine can help you to avoid emergency repairs, which will be very expensive. You can prolong the lifespan of equipment and ensure that the safety standards are being complied to.
Long-Term Planning: Invest in long-term capital improvements that reduce operational inefficiencies. For example, making an upgrade to your energy-efficient systems may require an upfront cost but will lead to reduced utility expenses over time. Paying up front will essentially help long-term finances.
Regular Inspections: Make regular inspections to identify any potential problems early. By implementing preventive measures, you can reduce risks of large-scale costly repairs and make sure the property is complying with regulations.
- Negotiate Better Service Contracts
It is essential to review and renegotiate service contracts on a regular basis. Be this for cleaning, landscaping, security or repairs, service providers often increase their fees. If you are able to evaluate multiple bids, seek alternative vendors or negotiate long-term agreements, you can save big amounts of money.
- Optimize Staffing Levels
Staffing levels should be at an appropriate level for the size and needs of the property. By having too many staff, you can overpay. By not having enough staff, you can cause tenant dissatisfaction and an increase in vacancies. By utilising technology, you could reduce reliance on in-house staff and limit the amount of outgoing benefit and salary costs.
- Green Initiatives for Long-Term Savings
Investing in green and sustainable initiatives can be an excellent way to reduce utility and operational costs. These are costs that may require a high up-front cost but will tend to pay for themselves overtime due to the savings you make on energy and a reduction in maintenance costs.
Energy Efficient Upgrades: You could replace aging HVAC systems, lighting and insulation with alternatives that are more energy efficient.
Water Conservation: Install fixtures that save water. You may want to think about landscaping that requires less water.
Tax Incentives: By leveraging tax incentives and grants for green building initiatives, you can reduce your costs.
Rising property managements costs can be a serious issue in commercial real estate, but this shouldn’t put you off investing. There are multiple different strategies, relating to technology-driver solutions, focusing on preventative maintenance, optimizing staffing and investing in long-term efficiency measures. These strategies can all help property owners to reduce operational expenses without sacrificing service quality.
In the current competitive real estate market, being able to control management costs doesn’t just mean preserving margins. It also includes the maintaining of value of property and ensuring long-term profitability. By using proactive and strategic strategies, CRE investors can be more efficient in their portfolio management and maximize their income. We hope you found this beneficial. If there is anyone you think would find this blog helpful, please share!
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