Every recession produces the same reflex among businesses: “We’ve got to save money now!” When there are fewer customers buying less of the products or services a business is selling, cutting expenses is a natural response.
From an administrative or operational perspective, this is usually the right response. It makes no sense to keep spending on raw materials, for example, while unsold inventory piles up. And when it comes to people and processes, pressure to cut expenses can foster greater efficiency and innovation, setting up businesses better for the long haul.
The ever-present quandary, though, is the need to generate enough revenue to preserve as much value for the business as possible. This applies to commercial real estate as much as to any other business, with the additional complication of the industry’s traditionally long customer lifecycle.
In part because of that long lifecycle, the economic impact of the COVID-19 recession on CRE may be delayed. But it seems bound to hit hard when it arrives, with Moody’s Analytics projecting that office vacancy in the United States will reach an all-time high of twenty percent by 2022.
So what are commercial building owners to do? Should they try to conserve net operating income by pinching pennies on marketing expenses, focusing instead on retaining existing tenants? Or should they anticipate higher customer churn and invest more in making their differentiated pitch to a slowing market?
It was with great interest, then, that I looked through the responses to our Commercial Building Manager’s 2021 Budget Priority Report related to leasing and marketing expenses. It wasn’t surprising to see that most (about 60 percent) of our respondents anticipated essentially no change to their leasing budgets in 2021. But the opinion of the remaining 40 percent was split. About a quarter expect to budget more for marketing next year than they did for 2020. By contrast, about one out of six are planning to budget less.
The numbers got even more interesting when I drilled into the segments of respondents. For example, among those whose organizations own commercial properties, 28 percent are budgeting an increase in marketing expense. But among those representing pure third-party property managers, only seventeen percent say the same.
These differences are not huge, but they are big enough to be meaningful. So what might account for them? “Obviously third-party managers are trying to market their services to asset managers,” says Rob Brierley, VP of Property Management for Bulfinch in Boston. “Keeping expenses down is appealing to asset managers when they are making a selection of a third-party manager.”
Brierley also points out that there are many cases where owners outsource property management, but not leasing. Or they may outsource the two functions to different service providers. So some pure third-party managers may have limited insight into their owners’ thoughts about leasing, at least until the budgeting process moves further along in the fall.
Another factor is a general reality of commercial real estate, which is that budgetary decisions are always highly situational. “It really depends on exposure from a lease rollover or vacancy perspective,” says Todd Mitchel, Director of Property Management for Bridge Commercial Real Estate. A building with high occupancy, financially strong tenants, and longer-term leases, for example, will be positioned to save on marketing expenses.
On the other hand, a property facing more potential vacancy in the near-term would be more inclined to spend more. For them, cutting the marketing budget would be like a store turning off its “open” sign to save money while potential customers walked right by. These buildings may need to get creative. “One of the positive byproducts to the COVID situation is the movement towards technology,” notes Mitchell. “Both owners and third-party managers are making a shift toward leveraging virtual tours.”If you didn’t offer a virtual tour before, you probably need to now if you want to get deals done.”
One final thought on this is that owners and the asset managers who represent them often have a different, more strategic and portfolio-level perspective than property managers. They are used to thinking more about both sides of the ledger, revenue and expense. To them, marketing falls more naturally in the “investment” category, which could account for the fact that more of them are apparently willing to spend more on it, even in the face of the recession.The debate underscores the overall challenge of budgeting for 2021, which is going to be another strange year for the industry. We’re pleased to offer some resources to help. First, our report serves as a budgeting guide to asset and property managers, whether they follow the conventional wisdom or take a more contrarian view. Also, don’t miss our webinar Budgeting for the Unknowable, where I’ll ask a panel of industry experts for some recommended approaches to planning for uncertainty.