Industrial Midwest

Property management: Always in demand

| markt

In good times and bad, property management plays a vital role in commercial real estate. Recently, Phil Stafford, head of property management for Colliers International in Chicago, sat down with Chicago Industrial Properties' Mark Thomton to discuss the state of the industry and how owners are utilizing property management services in the gradual recovery.

Phil Stafford leads the Property Management division for Colliers International in Chicago, including responsibility for nearly 42 million SF in 267 buildings. He began his career in architecture, with a degree from the University of Illinois at Champaign, where he also received an MBA. Stafford worked for VOA right out of school and was a member of the teams that renovated Navy Pier and McCormick Place. He then found his way into property management, working for such firm as Prentiss Properties and Lincoln Property Group.

He joined Colliers International a little more than five years ago and has overseen the firm’s large expansion into property management services.

“As brokerage, both on the investment sales side and the tenant/landlord representation side, ebb and flow more wildly with the overall health of the market, property management is that static recurring business,” says Stafford.

Recently, Mark Thomton, associate editor of Chicago Industrial Properties, sat down with Stafford to discuss his firm’s expansion and the state of the property management industry. Here is a portion of their conversation.

Q:  How has your property management practice grown since you joined five years ago?

A: We have had great growth over the last five years, rising from 14 million square feet of property up to 44 million square feet of property. The industrial component of that portfolio is about 35 million square feet. We had about 30 professionals in the property management group in 2005 and now we have 130.

Q: What can you attribute that growth to?

A: I think the growth was from the relationships in this office and the leasing and sales platforms. I think it came from the firm’s strength on a national basis and relationships we have in other markets. It was also pounding the streets, chasing opportunities, watching sales, and trying to grow our platform. We have had a very positive growth pattern.

Q: What is demand right now for PM services?

A: Fundamental demand never goes away. You need it in good times and in bad times. We are really an extension of ownership to service and retain the tenants, to maintain the property, enhance curb appeal, and reduce expenses. In the past few years it has been more protect, preserve and survive for owners. The focus has been more on the expense side and trying to get by without too much damage. I think now, as things are getting better, there is new investment to capture new demand. As corporations and tenants are making decisions, owners are making decisions with regard to the real estate. They are interested in recommendations from us on repositioning assets and spending money to better compete within their competitive set.

Q: As confidence and activity are returning to the market, what are some of the initiatives you are taking on with owners?

A: In a property with vacancy our first step is to understand our competitive set. We work with our brokers to get that information and their recommendations. We know that we are going to get one shot in a showing to make that impression. Tenant reps are out seeing lots of buildings with their clients, so the curb appeal and interior appeal have to be perfect coming right out of the gates. We are spending time with make-ready work on vacancies. We want it to feel clean, open, and light. We are getting the space into a position where it can be occupied quickly. We are thinking about splitting utilities, making sure restroom facilities are there, and rightsizing office space. You have to try and be smart with the money, but when you get that showing, you have to make sure that tenants and their representatives are impressed so it makes it to the next round.

Q: Are you seeing a lot of activity with distressed properties?

A: Over the last two-to-three years we have added a distressed asset services. We have a team that focuses on receivership and ultimately leasing and disposition. We have found that the local activity has mirrored the CMBS transactions nationally. There hasn’t been a ton of industrial (distressed properties). Multifamily and retail have led the charge and industrial has only made up about 3-4 percent of the distressed product. We have seen a pick-up in flex showing up as product. You have lower credit tenants leasing smaller spaces for shorter terms. You can see that combination would lead to more risk. As properties are now revalued, those are the ones that are showing up on our radar. If we have had 20-25 receiverships in the last three years that tend to cycle in six-to-nine months based on the court system, it is just now starting to get into the flex product. I think we still have a few years of this activity ahead of us. There are a number of loans maturing from the healthy part of the cycle that were 7-10 year notes. A big chunk of those will be turning over in the next few years and that is where you will see this big loan-to-value issue that is causing distress.

Q: Talk about competition today…how can you set your firm apart?

A: Vacancies are high, construction continues to be expensive and rents are depressed. That is a stressful environment. The brokers are in the position to capture opportunities and we are there to help them by supporting them and enabling improvements. It’s been difficult to make deals.

Completing tenant improvements quickly and brining owners and tenants expectations together continues to be difficult. There always seems to be a disconnect, whether small or large, as the tenants’ requirements evolve. That then relates to the economics of the deal and the TI package that the landlord will offer. Municipalities have been challenging. There are long lead times on permitting. When you get a tenant on the hook, you want to get them in quickly.

Q: What do you think this stems from? Are municipalities understaffed?

I want to keep it at a glass half-full. We have had really good experiences in Morton Grove, Naperville, and Mount Prospect. Those are towns that have streamlined their processes and have been particularly cooperative and engaged with brokerage firms and incoming corporations. We are hopeful that some other villages and cities will see that and participate more actively with brokerage firms in the future.

Q: Investment sales picked up quite a bit, how does that provide you with opportunities?

A: It is a positive boost of energy. Certainly, it is a double-edged sword. We are concerned when our assets go up for sale, but then we have the first shot to brag about the work we have done to date and hopefully retain the business. It is a great opportunity to increase the number of properties that we handle and grow with existing and new clients. We pride ourselves on our ability to support acquisitions by our current partners, with physical conditions evaluations, record reviews, and expense comps. We find that we can add a great deal of value to the underwriting. On the sell side, our primary goal is to protect our existing clients and facilitate a smooth sale. It’s great to see new activity in the market. It is very positive.

Q: How have green initiatives and energy efficient practices performed during the recession? Do owners till want to engage in these practices?

A: Unless a tenant or an owner on the industrial side has a corporate mission to implement a green strategy, we are really not seeing a lot of that. In industrial, the tenant is the primary driver of utility use and systems efficiency. The mechanical, systems, plumbing, and cleaning are often all tenant responsibilities. Implementation of green strategies requires the control of those things. With tenants in control of them, you really don’t see it too often in industrial. The real opportunity in industrial seems to be on the development side. They have the chance to build with green products, implement strategies like daylighting, reflective roofs, and water management. We did have one notable success on the green side with industrial. Last year we completed a full building retrofit at 740 Prologis Parkway in Romeoville. Kimberly Clark is a single, 800,000-square-foot tenant there, so you have full control of the building. We installed T5 lighting throughout the project and we were able to receive a federal income tax credit for energy efficient installations. We received an Energy Star rating on the building, which is pretty unusual for industrial.

Q: How do you see the rest of the year playing out?

A: I’d say the mood is improving, but remains cautiously optimistic. Certainly on the industrial and office leasing side, we are seeing some fairly significant renewals, expansions, and new leasing. There is y still a great deal of vacancy and distress, but there is optimism from the velocity of investment sales and the return of debt and equity to the market. What may be a great indicator to note are the calls we receive from national and international investment sources that are interested in investing in Chicago. We feel positive momentum.