Budgeting, COVID-19
No one can call 2020 a typical year in any aspect. With many property professionals in the midst of budget season, the prospect of looking to 2021 can be more than a little bit daunting. Asset managers typically have their eyes focused on the future, so this era of the unknown has brought unique obstacles.
Balancing the Books There are many questions that property professionals are asking themselves with concern to the 2021 budget. For Executive Vice President for Real Estate Operations George Wells with Piedmont Office Realty Trust, most of the questions centered around operating costs. “Rarely are your occupancy levels in buildings materially different from your leased numbers, but shelter in place orders this past spring caused a seismic, immediate divide between the two,” Wells said. During the COVID-19 pandemic, many organizations saw operating priorities shift to air filtration, HVAC capacity, and new touchless technology installations. Mark Dukes, vice president of asset management with Physicians Realty Trust, was in a unique position when it came to operating costs as the many medical office properties remained open during stay-at-home orders.
Asset Managers and the 2021 Budget Building by Building
“When it comes to the financial, we watched the increase to our operating expenses because we didn’t shut down,” Dukes said. Reduced occupancy levels combined with fluctuating operations costs mean big questions for budgeting for 2021. Dukes said he believes that a reduction in those elevated costs is not likely. As the world continues to adjust to its new normal, he said he thinks those expectations of sanitation and air quality will remain. There are also questions surrounding tenants and leasing in 2021. With a focus on value adjustment and projections, the asset managers’ view of 2021 may be cloudier than in past years. Many calculations in the budget concerning growth will be more difficult to make than in year’s past. “The number one concern I see is the gross-up calculations for recoveries. I think it’s going to be extremely tricky this year,” Wells said.
With a shock to the system and occupancy questions still looming, this budget season will be unlike any other. Teams will need to find new ways to be confident in the numbers they are presenting and most likely conduct more in-depth research on their properties to find patterns, trends, and projections. Dukes said this level of preparation is needed for the number of unknowns still out there about the next year. He said his team has dealt with a lot of questions on the revenue side of the equation. According to Dukes, property teams should be cautious with their growth projections and have ample reasoning when presenting in budgeting meetings. “For us, the questions are more on the revenue and occupancy side,” Dukes said. “How confident are we that when we say ‘this is our 2021 revenue’ that we are going to hit those numbers?” This year also differs in the lack of tenant to property professional contact. Usually, tenants and property managers can build relationships and gain an understanding of the long-term goals for their space. For an asset manager, these insights are key to budget and the overall vision for the property.
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Insight • Issue 3, 2020
