Asset Managers and the 2021 Budget

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.

“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.

Building by Building

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.

“The challenge is not knowing when people are going to return to buildings,” Wells said. “It’s hard to stay engaged with your tenant base and maintain those relationships and try to grow those business relationships remotely.”

It is also important to factor in the major maintenance schedule changes that many organizations experience. With lower occupancy rates and fewer tenant requests, many maintenance teams used this unusual circumstance to complete projects around the property.

This means some organizations shifted around deferred maintenance schedules, completed extra back of house projects and reset certain systems settings to a more energyefficient state. Take the time to calculate the impact this shifted schedule may have on 2021 maintenance projects.

Team Effort

At the end of the day, asset managers are a part of a larger property team. During budget meetings, it is important to have the perspectives of multiple members of the team. Wells said that budgeting requires a holistic approach and one the encompasses fresh takes on an existing property.

“There’s got to be a planning session before a budget session because I think having a planning session will give everyone a chance to reinforce what’s important,” Wells said.

These uncharted waters also allow for an entrepreneurial spirit. It is important to consider the new world that the industry and its tenants live in. What was always a high priority or low priority may be completely different now.

Wells gave the example of staircases. With many elevators needing lower occupancy to comply with physical distancing, stairwell maintenance and design may become a more important piece of the re-occupancy puzzle. It is these types of considerations that must be made when budgeting for 2021.

Asset managers and property managers must work together to produce creative, budget-friendly ideas to accommodate these new

challenges. Dukes said he was proud of his property teams and their daily work to keep tenant satisfaction and safety as a top priority.

“The property management and maintenance community has done a fabulous job of getting in front of this and keeping people safe,” Dukes said.

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“For us, the questions are more on the revenue and occupancy side, How confident are we that when we say ‘this is our 2021 revenue’ that we are going to hit those numbers?”

Special Look: Medical Office

While much of the world slowed down during the original shelter-in-place mandates, medical office buildings were experiencing a different set of challenges. Many medical office buildings saw an increase of foot traffic and difficulties concerning the supply chain.

Dukes said that while there are always worries concerning a second wave, he feels confident that the industry has sorted out many of the issues confronted when the pandemic first hit. He said that when it comes to budgeting, expenses are not his largest unknown anymore.

“I don’t think there are big questions on the expenses side,” Dukes said. “I think we have a really good grasp on what it’s going to take to operate the building.” He said that while there was a chilling effect with foot traffic in the first months of the COVID-19 pandemic, he has seen people warm up to the idea of visiting medical office buildings again. In terms of growth projections, Dukes said he is in a unique position of stability, but that it is important to remember a larger picture.

“This new normal is not temporary,” Dukes said. “Thankfully, our portfolio has been resilient, and we haven’t lost tenants.”

Budgeting for 2021 comes with a lot of questions. With property managers’ daily insights and the asset managers’ holistic view, organizations should be able to innovate and navigate through to 2021.

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