Commercial real estate is undergoing one of its steepest value declines in memory. There is very limited capital. Underwriting is tight, if not non-existent. Occupancy rates are plummeting and with them cash flows, net operating incomes, demand for space and, finally, asset values. For owners and managers today, that means leaner and more efficient operations and an internal management focus.
So why are owners of large real estate assets significantly increasing their capital expenditures – particularly in security? Are there more security-related incidents in office towers these days, more muggings, leaks, terrorist concerns? Are people succumbing to the stress and acting out?
When times are tough, people want to feel secure – secure in their health, secure in their finances and secure in their homes, even if that home is an office building. A nationwide survey conducted by the Society for Fire Protection Engineers (SFPE) reveals that building security topped a list of characteristics as Americans’ most important feature in public buildings. The list included comfort, fire safety, environmental friendliness and other amenities.
Even with this time-honored interest in security, there is an equally important and perhaps more powerful economic driver – cash. Traditionally, commercial real estate returns were comprised of income from cash flows (NOI) and appreciation, but during the asset value inflated bubble, trading buildings generated the highest returns. Reverberations from the bursting bubble shifted commercial real estate revenue generation from this transaction oriented focus back to a management oriented concern. With cap rates rising, owners are returning their attention to cash flow generation as their main source of revenue. They are investing in capital improvements that translate into retained tenants and perhaps even new tenancies when the market recovers.
Clearly, the commercial real estate industry is undergoing a major transformation underpinned by new strategies, better business models, more efficient business practices and new systems. Hence, we are seeing a renewed focus on better management, which requires vision, leadership, and a customer focus. A two-pronged focus on enhanced security and lobby improvements will pay NOI dividends.
It’s like killing two birds with one stone. Or, perhaps the better axiom is, “a bird in hand is worth two in the bush.” Keep those birds-in-hand happy by feathering their nests with newer lobbies and better benefits.
