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Commercial Building Manager’s 2021 Budget Priority Report

The emerging consensus within the commercial real estate industry is that the office sector is looking at a long period of recovery related to the COVID-19 pandemic. Government stimulus has so far helped mitigate a feared collapse in rental income, but no one is certain when tenant employees will return to their offices in large numbers, nor how many person-days they will spend there once they do.

Industry leaders are settling in for an extended purgatory. “Don’t overreact to the next six to twelve months,” urged Henry Chamberlain, president of the Building Owners and Managers (BOMA) International in his annual State of the CRE Industry address in July. “We expect things to be getting back to normal in 2022 [emphasis added].”

This means that asset and property managers have to think about operating their buildings at nowhere near full physical occupancy for the next 12-18 months. As the budget season gets into full swing, traditional practices like baselining and benchmarking with tools like BOMA’s Experience Exchange Report (EER®) will not alone prepare managers for 2021.

This report is a resource designed to fill that gap in budgeting insight. Based on primary research among commercial office asset and property management professionals, it offers tangible guidance to those preparing for another tumultuous year.

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Methodology

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This report is based largely on a survey fielded from July 14-30 of 2020. The survey was targeted to asset and property managers who serve commercial office buildings in the United States and Canada. Propmodo and BOMA International partnered to promote survey participation among their respective networks of commercial real estate professionals. Respondents were offered a complimentary preview of the results as an incentive for participation. The survey received 190 responses, which allowed for analysis of the segments identified in the analysis.

In addition to the survey, Propmodo conducted targeted interviews with several asset and property management leaders, some of whom are quoted in the report. Additional quotes have been taken from public comments made by industry leaders speaking at virtual events in July of 2020.

Summary of Findings

Sixty percent of respondents to the Commercial Office 2021 Budget Priority Survey indicated that they expect rental income to be roughly the same in 2021 as in 2020. Another 6 percent expect an increase, leaving only about a third (34 percent) planning for meaningful income loss.

1. Real estate professionals are cautiously optimistic about rental income

Sixty percent of respondents to the Commercial Office 2021 Budget Priority Survey indicated that they expect rental income to be roughly the same in 2021 as in 2020. Another 6 percent expect an increase, leaving only about a third (34 percent) planning for meaningful income loss.

So far, the sharp decline in rent collections many in the CRE industry feared has not materialized. Because of government stimulus, “rent collections have actually been stronger than expected,” said Michael Broder, president & CEO of the consultancy Brightline Strategies at the July BOMA conference. His interpretation of that is that the true impact of the recession has yet to be felt in CRE. But by now, most building owners and managers have a reasonable forecast of rent delinquency, and the survey findings reinforce that.

This lines up with what some industry leaders have seen in their results so far. Todd Mitchell oversees office buildings in Boston, Atlanta, Houston, and Nashville as director of property management for Bridge Commercial Real Estate. He expects 2021 to look a lot like the second half of 2020, including a steady uptick in the number of tenant employees who come in over the next year. “We have created processes to make them as safe as they can be,” he says. “Although I’m not expecting a quantum technological leap that will solve all the challenges, I do expect people’s comfort levels to continue to trend in the positive direction as a result of the measures our teams are taking.” Mitchell recognizes this may take time. But so far, the tenants he has are paying rent.

2. Asset and property managers are approaching 2021 with a conservative asset strategy

More than three quarters (77 percent) of survey respondents anticipate pursuing a strategy in 2021 that is more conservative (i.e., characterized by controlling costs, maximizing efficiency, and defending occupancy), than what they set out to do in 2020. Only 7 percent plan to be more aggressive by increasing investment or repositioning assets. Operationally, over half plan to rebid their existing service contracts to manage costs.

“When the pandemic started, we worked with all our partners and managers in the short term to look critically at all non-essential capital,” says Brian Harnetiaux, executive director, asset management at USAA Real Estate. This illustrates the position of most owners. But “more conservative” does not mean investment will stop completely. “At the same time,” Harnetiaux says, “we encouraged them to be creative and look for ways to make a property more leasable, both in the short and long term.”

Bridge’s Mitchell agrees. “We had pressed pause like everyone else,” he says. “But we have been taking the pause off the projects that make sense. Why would we not execute a project if it helps leasing?” He adds that for companies that are still evaluating property acquisitions, there is capital available for improvements. “Why would you buy and then not invest?”

3. The time for touchless features and systems has arrived

The area most frequently for new investment by survey respondents was touchless systems, with 43 percent indicating it as a priority. This is a broad category that includes everything from no-touch access control to doors that swing open with the push of a shoulder or the pull of a foot.

A majority of survey respondents expect significant operating expense increases for cleaning in 2021—52 percent, more than twice the proportion citing any other expense category. Furthermore, More than one third (37 percent) plan to rebid cleaning contracts at their properties, while almost as many (32 percent) will implement or continue new procedures, including not only higher standards but also new schedules to make cleaning activities more visible.

4. Cleaning will remain a big focus in 2021

As it relates to COVID-19 specifically, the focus on surfaces may be the product of inertia from the earliest countermeasures the industry took against the spread of the virus. Instructions at the time emphasized frequent hand washing and sanitizing commonly used surfaces. But by May, the Centers for Disease Control (CDC) had updated its guidance to downplay the likelihood of transmission via surfaces as of May 22. Derek Thompson of The Atlantic has even suggested in a July 27 article that hyper-cleaning is mostly “hygiene theater,” making people feel better without proven justification.

As a counterpoint, Sheryl Schulze, global repositioning and landlord services lead at Gensler, believes there’s a long-term place for healthier buildings. “We will see more guidelines and programs written to measure the health of buildings,” she said at the July BOMA International conference. “Before, amenities were the key to the workplace; now, it’s health.” Her response when asked if this is all an over-correction: “Not really. We should be doing a lot of this anyway.”

Brian Harnetiaux sees the merit in both perspectives. “Right now we in the industry are being forced into 10-month decisions rather than the 10-year decisions we are accustomed to making,” he says. “For example, landlords are increasing cleaning specifications and frequency so our customers will feel more comfortable in their work environment.” At the same time, he understands the rationale. “When I came back for my first day in the office since March, it gave me a reassuring feeling to see a card on my desk indicating that it had just been cleaned.” He points out that building management will want to make sure tenants are aware of the extra effort landlords are performing on their behalf. “One reason we do little things like having the janitorial staff put those cards on the desks is that it goes a long way toward making the effort as visible as possible.”

5. Managers plan to offset expense increases with savings on utilities

Energy (20%) and water/sewer (17%) were the most cited areas where respondents anticipate operating expense savings. There is some basis for this belief. “Our utilities were down 25-30 percent in Q2 of 2020 because low physical occupancy meant we did not need to run the HVAC all the time,” Harnetiaux notes of the lockdown period.

But as Mitchell points out, savings that dramatic should not be assumed to continue: “The sneaky thing with energy expense is that if you operate the building with 10 suites that are fully occupied versus 10 suites that are each only 10 percent occupied, you still have to run it at maximum capacity.” He expects there to be some utility savings compared to originally budgeted amounts for 2020, but nothing like in Q2.

Another concern to iron out is what to do about the positive expense variances buildings are sitting on right now. Tenants not on net leases—who have not been making full use of their offices—will want to realize as much of that savings as possible. On the other hand, building owners will be reluctant to write checks back to their tenants. It will be a challenge for asset and property managers to find equitable solutions.

6. PropTech will play a vital role

Most senior leaders (53 percent) and nearly half of urban specialists (48 percent) and respondents representing owners (46 percent) plan to implement new technology in 2021. Their top motivation: Improving the tenant experience, cited by 35 percent of owners.

A clear need for building management teams is clear, consistent, frequent communication with tenant occupants to let them know about current building schedules, procedures, and other pertinent information. Tools like Bengie™, an AI-powered chatbot built by Building Engines, enable communication and service requests via text and Slack. Apps like HqO, Lane, Equiem, and Rise offer information sharing and other tenant-oriented features. At the CRETech Global Summit in July 2020, Cushman & Wakefield CIO and chief digital officer, Adam Stanley cited tenant experience technology as his company’s top digital priority for customers, noting that the pandemic has “proven that tenants need to access building services through their smartphones.”

There are many other technologies related to the tenant experience, including mobile access control and a range of solutions to measure occupancy within certain areas of a building. USAA’s Harnetiaux has been looking at taking cameras already at properties and making them “smart.” “That will enable us to do several things, including be more efficient.” he says. “For example, to send a day porter after amenity use, or count entrances to restrooms to know when to restock. Those types of technologies will be really important in managing a variable number of occupants.”

Detailed Analysis

Respondent Demographics

Nearly 200 commercial real estate operations professionals contributed their insight to this report, most by participating in a survey (see notes on methodology above). The following analysis breaks down the results, including differences among key segments of survey respondents.

Nearly half of respondents (a combined 48 percent) reported being in the role of property or facility manager. The rest split roughly evenly among asset managers (17 percent), regional leaders (17 percent), and executives (14 percent).

Most respondents (a combined 61 percent) work for an organization that owns commercial real estate properties. Similarly, nearly three quarters (a combined 73 percent) work for commercial property management companies. There is substantial overlap between the two, with 40 percent working for organizations that both own and manage. While most results show a consensus, there are some meaningful differences in perception based on whether or not respondents’ firms are owners.

Nearly nine out of ten (88 percent) of respondents serve commercial office properties, with many also serving other commercial property types as well. This is expected, as the survey was targeted specifically toward the office sector of the industry.

Slightly more than half of the respondents (53 percent) represent urban multi-tenanted office buildings. The office sector is not homogeneous, but these properties tend to face the greatest breadth of operational challenges, such as vertical transportation and more rigorous access control. In many respects, these properties tend to be pioneers in developing solutions to industry issues. One hypothesis of this study, then, was that respondents from this subsector would have a distinct point of view as to budgeting for 2021.

Based on this respondent profile, there are five key segments of respondents. Importantly, these segments often overlap–they are not mutually exclusive, except as noted. The identified segments are:

  • Property owners – These respondents work for an organization that owns commercial real estate; it may or may not also manage that real estate (61 percent of respondents)
  • Pure managers – Respondents whose organization manages commercial properties, but does NOT own them (33 percent of respondents)
  • Property/facility managers – Respondents reporting their role as either a property or facility manager (48 percent of respondents)
  • Senior leaders – Respondents reporting their role as one of: C-suite/executive, regional VP/director, or asset manager (47 percent of respondents)
  • Urban multi-tenant specialists – Respondents who personally serve urban, multi-tenanted office buildings; they may also serve other commercial property types (55 percent of respondents)

Where meaningful and helpful, differences among segments are highlighted in the analysis below.

Asset Strategy and Investment Priorities

The analysis begins with a baseline of respondents’ strategic outlook on the next year. Most are somewhat optimistic about rental income at their properties in 2021, with 60 percent expecting it to be within 10 percent of the amount originally budgeted for 2020. An additional 6 percent actually expect an increase, which means nearly two thirds of respondents expect income at least to hold steady.

Pure managers are the most optimistic in this regard, with 11 percent of them (almost double the overall proportion) anticipating an increase in rental income. While this is not a large percentage, it does suggest the possibility of a disconnect between some property owners and their third-party property managers–one that must be resolved to prepare a useful budget.

Despite the apparent expectation of income stability, most respondents (77 percent) plan to execute a somewhat or much more conservative asset strategy in 2021 as compared to 2020. This means they will focus on expense control, efficiency, and occupancy, as opposed to increasing investment or taking the opportunity to reposition their assets. Only 7 percent plan to pursue a more aggressive strategy.

Here there is another difference between building owners and pure managers. This time, managers are more likely to anticipate a conservative strategy, with 84 percent of them saying so versus 75 percent of owners. This difference carries forward to respondents’ outlook on capital budgets. While few expect an increase in 2021, building owners are nearly three times more likely than pure managers to do so (11 percent versus 3 percent). Owners are also the least likely to expect a large decrease in capital expenditures, while pure managers are the most.

An area of agreement among respondents is the priority placed on investing whatever resources are available in touchless building systems. It is the top priority for all segments, though not quite gaining majority support of any segment. Energy management also ranks among the top priorities for every group.

Among the notable standout priorities within the segments are the emphasis senior leaders place on air quality and tenant engagement. Access control makes the list of priorities for property/facility managers and urban specialists, which makes a great deal of sense for the latter group in particular. Lobby / common areas are cited especially by pure managers and respondents in property/facility management roles.

Operational Plans

The year 2021 will present new challenges for asset and property management professionals, and they have a wide array of options to consider in adjusting their operating practices. Managing a commercial property is a multifaceted enterprise that covers multiple accounting categories.

Cleaning will be a clear focus area. Among all respondents, 37 percent plan to rebid their existing janitorial contracts, and 32 percent expect to continue or implement updated processes or specifications. These are the most commonly cited planned actions among the many possible options presented in the survey.

Below are the items cited by at least 20 percent of each segment–a long list, but full of insight. Some noteworthy highlights include:

  • Senior leaders cited the most individual items, which may be a reflection of the relatively broad scope of their responsibilities. Notably, they are looking to implement technology in multiple areas, including energy management, security, tenant engagement, and building communications.
  • Respondents representing pure managers and those in property/facility management roles both emphasized rebidding contracts among a much narrower set of plans, not only for cleaning, but for security, preventive maintenance, and exterior roads/grounds/parking as well. Managing vendor cost is a consistent way for managers to serve owners whether or not there is a pandemic.
  • Building owners (along with urban specialists) placed relatively more emphasis on changing processes to engage and communicate with tenants.
    Urban specialists are the most focused on tenant engagement through both changing processes and implementing technology. Like senior leaders, they cite plans for new technology in multiple areas, including energy management, tenant engagement, cleaning, security, and communications. This emphasis underscores the level of expectation tenants have of office buildings in urban areas.

Operating Expense Outlook

Asset and property managers generally expect that, as cleaning practices adjust, so must costs. Most anticipate an increase of at least 10 percent in the cleaning line item in 2021, and about 1 in 10 see that increase exceeding 25 percent. In light of this, it is no wonder that so many expect to rebid contracts.

In a tie for a distant second place are the tenant engagement and leasing/marketing categories. About a quarter (24 percent) of respondents expect increases in expenses for both, but there are differences across the segments in both the order and strength of this expectation.

Most strikingly, 34 percent of senior leaders expect to spend more on tenant engagement, more than double the 16 percent of property/facility managers. Similarly, 30 percent of senior leaders expect increased leasing/marketing expenses, compared to 21 percent of property/facility managers.

There is also a disconnect between owners and pure managers when it comes to leasing/marketing, where 28 percent of owners expect increases, compared to only 17 percent of pure managers (placing the category outside the top four for this segment).

A similar, if less pronounced, pattern exists in the response about expected expense decreases. Among owners and senior leaders, energy is the number one category where savings are expected relative to 2020, followed by water/sewer. But for pure managers and those in property/facility management roles, leasing/marketing is the most cited category. Taken together, these results are enough to suggest that owners and senior leaders are thinking similarly to each other–but differently than others–about the importance of allocating resources toward pursuing new lease transactions in 2021.

Technology

As noted above, a significant percentage of respondents, including a majority of senior leaders, intends to implement new building technology in 2021. For most groups, a better tenant experience is the primary motivator. For pure managers, however, the long-standing promise of saving money through technological innovation is most attractive.

Of note is the perception of urban specialists about technology. With senior leaders, they are among the most likely to be implementing new technology. Their motivations, however, more resemble those of building owners in that they are much more focused on providing a better experience than on cost savings.

Conclusion

The budget preparation process for 2021 will be unlike any other for commercial real estate professionals. There is so much uncertainty about both short and long term physical occupancy that projecting expenses will be extremely difficult. Our hope is that this report will be a valuable help in several ways:

  • By identifying the priorities of industry leaders and peers, and particularly of those who represent building owners, even as the path toward achieving them is challenging
  • By exposing important areas where the potential for misunderstanding is high among various members of a property operations team, leading to discussion and resolution
  • By suggesting a basis for calibrating operating expense budgets rather than relying on traditional benchmarks
  • By sparking fresh ideas from the collective wisdom of participants in this research
  • By revealing possible opportunities to make strategic choices for particular properties that may run against the grain of conventional wisdom

Management teams taking one or more of these steps can help put their property or portfolio on a good footing to weather the unusual circumstances of the economic recovery from COVID-19, setting it up to accelerate value creation in the future.

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