Bringing Technology to the Tenant Experience

Real Estate Trends for the 2022 Budget

By: Becky Hanner, Hanner Commercial Asset Services

Being the smart property manager that you are, you already knew to pour that cup of strong coffee, block off a large portion of your day, hit ‘do-not-disturb’ on your phone and find a quiet area to focus solely on budgets. This is a good thing too, because 2022 is not a normal budget year! But before we get into real estate trends you might wish to consider to include in the 2022 year, let’s review some budgeting basics.

Remember who your customer is and what their goals and objectives are. If you enter into this process in a mechanical fashion - auto-drive, if you will - then you most certainly will miss your mark. Be certain you are clear on what the property owner wishes to accomplish this coming year so you can implement these objectives into the budget. Owner’s goals change, and you may find a completely different mindset for the property than previous approaches, so don’t assume you know the direction of the property until you have this discussion.

Your 2020 actual likely missed its target due to COVID-19. Perhaps your utilities were less than anticipated due to having fewer people in your building. Conceivably your cleaning expenses were higher due to intense cleaning practices. OR maybe you were able to normalize operating expenses by strategically working on special projects. When it was time to start the 2021 budgeting process, you may have budgeted additional costs into the budget to continue the higher standard janitorial and antiseptic surface coverings or perhaps you anticipated higher security and insurance costs.

No matter where your 2021 actual to budget compares, your historical data over the past two years could be skewed. Many property managers tackle budgets based on historical data. For 2022 you might consider developing a zero-based budget rather than viewing each line item on recent history. This will help you look at each income and expense item through a different lens and may afford you the possibility of achieving greater income potential or discover areas for expense savings.

As an example, a strategic action for the property could be to have it professionally measured to the latest BOMA standard. For office, that currently is the 2017 standard or “BOMA/ANSI Z65.1 2017”. Measurement professionals have found that buildings grow an average of 2-3% when remeasured due to minor construction modifications during development, tenant renovations or simple miscalculations. If your building is 100,000 square feet and an additional 2,000 square feet is found, this could equate to added future revenue. A conservative $20.00 per square foot rental rate would bring additional revenue of $40,000 per year. A 5% cap rate adds $800,000 value to the asset. The cost to remeasure is minimal – approximately $4,000 for a building of this size.

After considering these budgeting basics, what real estate trends do you need to consider for the 2022 year?

Three things you will need to give thought to are 1) health and wellness; 2) technology; and 3) amenities. These three things are high on the list of your prospective tenants wants. In fact, you may have noticed that HR is more involved in site selection than ever before because the company location is a recruiting tool. Workers want to work for a good company, but they also want to be somewhere they wish to work. Your building will have a better competitive edge if it has or is implementing the following three things.

Health and Wellness

The desire for health and wellness has escalated over the past two years. Don’t confuse this with LEED or BOMA 360. Buildings that have achieved a LEED rating is because of sustainability achievements. Building best practices are demonstrated by obtaining the BOMA 360 recognition. A WELL or Fitwell certification will show the property owner’s support for the building occupant’s comfort and well-being. Entering into a program focused on health and wellness will help you attract tenants as well as appeal to your current tenants. While tenants are focused on building health and safety, don’t forget that sustainability and best practices are also very important.

Any time your property management team engages to achieve any one of these recognitions, they learn more about the building they manage. This process will help them focus on opportunities or gaps in their operational strategy. This is truly a bonus and will help your team’s case their skills and knowledge, plus be a great marketing tool for your property. Becky Hanner is a recognized thought leader known for growing businesses while positively cultivating internal and external relationships. Becky has been in commercial real estate for 30 years. A skilled mentor, Becky develops a strong work culture focused on high expectations, collaboration, and quality service delivery, and achieving process improvements through employee engagement.

Technology

There is a plethora of technology available in commercial real estate. How do you know which to consider for your property? One thing is certain, your tenants and prospects expect a modernized building. The good news is that once you choose and implement a technology, your staff should gain efficiencies in building operations, increase tenant satisfaction and be provided with powerful analytics.

Think back on how you ran your building before you had a building automation system (BAS). Reflect on how much more efficiently your building runs through the BAS. Your tenants are more satisfied and your team has data to analyze regarding building hours and utility use. Implementing the BAS system was a ‘win’ for your property.

Determine what needs you and your team have when deciding which technology to implement. Try to implement one technology each year. For example, you might wish to consider sensors in certain areas of your building to see how frequently certain areas are utilized. Prior to the pandemic many property owners threw money at hard amenities such as fitness centers which were rarely used. They were simply checking a box. Sensors could provide data needed to justify repurposing the fitness space into a leased space.

If you don’t have an electronic accounts payable system perhaps this is the technology you wish to implement to eliminate paper invoices, minimize the frequency of human touches needed to process an invoice and the ease with which to process. Consider what pain points you have in your building or your operations and consider technologies that can streamline and provide your staff efficiencies.

Amenities

As building occupants come back to the workplace, they want the same amenities they enjoyed before the pandemic, but they also want the conveniences they enjoyed at home. It is up to the building owners and managers to create an environment that not only gives workers satisfaction but also engages them. The in-place fitness centers and cafes may not be the answer since workers’ desires have evolved over the past two years. Creating events has become an integral expectation of the property management staff. Now is the time to consider every unique space you have in and out of the building as a potential amenity space. A lobby or fitness center could become a collaboration area, and imagine your café split up into flexible space with a portion designated for bicycle racking.

Your grounds and parking area are your blue ocean. Yes, you need to ensure your building occupants have a place to park, but think of the many varied food and service amenities you can alternate through your outside area. There are technology platforms such as MOBLZ and Go Amenity that provide the platform to handle and coordinate these services and save your staff time. Consider having a ‘health day’ at your park where you have chiropractic service, blood drive and massage service with your food trucks. On another day your theme might be hobby day with food trucks, bicycle repair, and fly-fishing lessons. Other thoughts are beauty days with haircuts, tanning and nail salons. Or have special day events like Valentine’s Day with candy, flowers and gifts.

In conclusion, budgeting for 2022 will be a challenge. The pandemic has altered our original plans and accelerated initiatives. Tenants are expecting more and are not pushing back on reasonable operating expense increases for trending technology focused on health, wellness and amenities. Be very deliberate and thoughtful as you review every budget line item to differentiate your building. Envision where you want your asset to stand in the market in the coming 2022 year.

About the Author

Behind the Curtain Challenges and Opportunities with Increased Tenant Transparency

By: Scott Baker, Baker Engineering

While energy performance has been the focus for most building owners, property managers, and building engineers for many years, there is now more of a push to see this reported.

In recent years, Environmental, Social, and Governance (ESG) reporting has had a swift uptick. For commercial real estate, this means reporting on our energy, emissions, water, and waste data as well as certifications earned at our buildings. Most of the requests for this data appear to be driven by building owners for either ESG reporting or internal reporting, but we are also seeing more tenants are requesting this data. These requests tend to be from tenants that are from national and international companies who are likely now reporting their ESG data. According to a November 2020 MarketWatch article, ESG investment “now represents 33% of the $51.4 trillion in total U.S. assets under professional management.” This has increased 42% from 2018.1

CREATING THE BENCHMARK

One of the most popular ESG reporting assessments, GRESB2, was launched in 2009 with a focus on the real estate sector. For the environmental portion of the assessment, the topics include energy, emissions, water, waste, and health/wellness. It covers performance using energy, water, and waste data while also tracking leading indicators that include audits and certifications for energy, water, waste, and health/wellness. While the commercial office sector is a little more streamlined for reporting this data, as main utility meters are typically invoiced to the building owner or property manager, industrial and retail buildings are more difficult to report. In many of these buildings, utilities may have triple-net leases which limit access to energy and water data for building owners. In these buildings, property teams typically ask the tenants for their energy and water data for reporting. Considering data confidentiality and availability at the local store/branch level as well as a lack of understanding as to why this is needed, this can be a difficult proposition. Given such, many property managers will pitch the data request directly to the tenant by encouraging a partnership to reduce both energy consumption and cost. They may also provide assistance in reviewing energy and water efficiency projects that can help the tenant’s bottom line while also improving the environmental performance for the building owner.

In most major cities in the United States, mandatory energy and emissions benchmarking programs have been introduced through local laws or ordinances. A map and list of these cities can be found through the Environmental Protection Agency’s website3. In addition, in June of this year, the House of Representatives passed legislation that would require public companies to disclose ESG metrics. If passed into law, this would require publicly traded companies to report on energy and emissions. All such laws and ordinances require more transparency around this environmental data, whether at the building or portfolio level. When it comes to public disclosure and reporting, the market and legislation are currently in sync.

Most of the local laws and ordinances require use of the Environmental Protection Agency’s ENERGY STAR® Portfolio Manager4 - a free online tool - to benchmark and submit energy, water, and emissions data. This tool takes in inputs of energy data and building characteristics including building size, hours, and occupancy data and then for eligible property types will produce a 1-100 score. This score shows a comparison of the input property against the large data set of properties used to create the scoring calculation. At the building level, environmental performance disclosure provides transparency for tenants to take operating expenses and building energy performance into consideration when choosing their new office location(s). For larger national or international companies, disclosure at the building level helps tenants to compare branches across their portfolio as well. In many of these markets, potential tenants need to seek out this information on their own or through their leasing agent or broker. Some cities are taking this disclosure a step further. For example, in 2018, New York City passed Local Law 335, which takes the required building emissions reporting and assigns a letter grade based on the ENERGY STAR® score mentioned above. Much like restaurant inspection scores are available to restaurant patrons, these scores are displayed at the building entrance to inform occupants of the energy performance of their building.

In a few local jurisdictions, energy and emissions benchmarking is also being used as a steppingstone towards emissions reductions. New York City, Boston, and Washington DC have implemented legislation aimed at reducing emissions. New York City has a goal to reduce emissions by 80% by the year 2050 and puts the responsibility at the building level to meet this requirement through Local Law 97. Washington DC plans to have a 100% renewable energy grid by 2032. Boston requires a 15% emissions reduction or an energy assessment can be performed to help guide buildings towards meeting future emissions reduction requirements. As these laws and ordinances build momentum, it will require landlords and tenants to work together to reduce energy consumption and emissions as building owners, property managers, and building engineers alone cannot achieve many of these metrics.

At the portfolio level, environmental performance disclosure allows for investors to make more informed decisions if environmental, social, and governance issues are important to them .

If climate change continues to be a focal point in the market, ESG reporting will included as a normal part of our job descriptions.

The other major area of transparency right now is around health and wellness. As building occupants are returning to the office in larger numbers, many want to stay informed as to what the building owner and property management teams are doing at their buildings to ensure their health and safety. Many property managers are being proactive in their communication to tenants by discussing how they have changed operations at their buildings. Such changes might include running building systems early and late to flush them out, increasing ventilation rates to dilute air recirculated in buildings, increasing filtration MERV ratings in their systems to filter out more particulate matter, implementing new technologies targeting virus and/or bacteria in the airstream, elevator distancing, touchless features within the building, and many others. If your property has undertaken Fitwel building certification, the Fitwel Viral Response Module, WELL Health-Safety Rating, or other wellness certification, promote this and add labels. In some cities such as Washington DC, annual indoor air quality (IAQ) testing is a requirement. If your building has performed this testing or adapted technology to add IAQ sensors into your buildings, be ready to share the results. If the data or information to be shared does not positively reflect the building, be ready to provide context in the communication. In addition to proactive communication, being ready to address tenant requests around wellness is a good idea. The vendors serving commercial real estate can be leaned on to help provide answers and strategies around some of the questions tenants might ask, such as “What is the air exchange rate in the building and how many CFM of outside air is my space getting?”. They may also ask about advanced filtration systems and sanitization systems; understanding some of those technologies can facilitate good discussions. Another common question is around cleaning protocols. Having information from your vendor showing how the building has addressed cleaning in tenant spaces as well as restrooms, common areas, cafes, etc. can help put tenants at ease as they are returning or planning a return to the office.

While interviewing several people within the commercial real estate industry for this article, the topic of returning to normal came up. Specifically, what are the expectations for the future related to wellness and what impact do those have on the office spaces of today? Though the coronavirus pandemic is slowing down in the United States, many businesses are already thinking ahead to the next pandemic and developing solutions to allow for business continuity. Many of the practices implemented within commercial real estate, such as hand sanitizing, tenant cleaning, and new tenant layouts with wider spacing and more flexible space options, are expected to remain in place for the foreseeable future.

As we move forward at our properties, being transparent and proactive while navigating a shifting landscape of environmental performance and health and wellness issues will be key to meeting the needs of our building owners, property managers, building engineers, tenants, and service vendors.

References:

1. https://www.marketwatch.com/story/esg-investingnow-accounts-for-one-third-of-total-u-s-assets-undermanagement-11605626611 2. https://gresb.com/ 3. https://www.energystar.gov/buildings/programadministrators/state-and-local-governments/see-federal-stateand-local-benchmarking-policies 4. https://www.energystar.gov/buildings/benchmark 5. https://www1.nyc.gov/site/nycaccelerator/resources/ll33. page

About the Author

Scott Baker oversees the Technical Services Department which focuses on Energy Sta Certifications, Energy Audits, Energy Modeling, Commissioning, Retro Commissioning, and LEED related engineering tasks. He has experience working with multiple rating systems including: LEED-NC, LEED-CS, LEED-CI, LEED- EBO&M, and ENERGY STAR®. Scott has more than 12 years of experience in HVAC systems design and commissioning. Scott has a Bachelor of Science in Mechanical Engineering Degree from the Georgia Institute of Technology.