5 Ways to Improve NOI
Increase industrial property value in slow market conditions.
by Jennifer Norbut
(Reprinted with permission from the July 2009 edition of CIRE Magazine.)
Improving industrial property value may seem impossible in an environment where sales prices are plummeting and tenants are demanding concessions just to stay put. But there are ways to improve a property’s net operating income, industrial market experts say, even in the bleakest economic conditions. These five tips can help industrial owners and managers plug spending leaks and improve their properties’ bottom lines.
1. Renegotiate Service and Supply Contracts. “It’s incumbent upon owners to push vendors and suppliers to lower costs in this competitive market,” says C. Mark Ambard, CCIM, president and principal broker of Ambard & Co. Commercial Real Estate in Kailua, Hawaii. Waste removal, landscaping maintenance, advertising, and security provide opportunities to lower routine costs.
Renegotiating service contracts to get the best rates possible also lays the foundation for future lease renewals, says Lee Y. Wheeler III, CCIM, president of Fidelis Commercial Real Estate Services in Beaumont, Texas. “Lowering rates keeps tenants happy and we stay in close contact with the providers to ensure top-notch service.”
2. Reduce Insurance Premiums. Unnecessary coverage adds significantly to a property’s insurance costs. A common — and expensive — mistake is to insure land where no risk of loss exists, “usually due to a misguided lender requirement,” says Nick Nicholas, CCIM, CRE, MAI, president of Nicholas Co. in Dallas.
Replacement cost insurance is another area for potential savings. “Replacement costs are generally priced from a manual or online pricing service. These numbers can vary greatly from reality,” Nicholas says. He’s successfully negotiated 50 percent reductions in replacement cost insurance premiums by providing credible cost figures from respected local contractors and proving the insured components are not “at risk.”
For example, in Dallas, tornadoes, wind, and fire pose the biggest threats to properties. “If you have 7 acres of concrete parking area and 3 more acres of concrete building slab on grade, there is no need to insure them against fire or tornadoes,” Nicholas says. Grading, site work, and underground utilities are other building development costs that are not at risk.
Finally, reviewing the policy’s deductible is a wise idea. “If the deductible is too low, the premium can be unnecessarily high. The goal is proper balance between risk and premium,” he says.
3. Reassess the Property’s Value. Commercial property tax valuations are subjective, thus leaving room for reductions. This is particularly true “if the property is located in a state that relies heavily on ad valorem taxation, which is an area of significant potential savings,” Nicholas says. In addition, many appraisers use a “mass appraisal” process to value parcels that present “an inadvertent opportunity for overvaluation.”
Owners can appeal their tax values directly or leverage the knowledge of experienced property tax appeal consultants, says Scott L. Reed, CCIM, managing director of Reed Realty Advisors in Portland, Ore. To maximize the process, owners and consultants must “craft a supportable valuation based on appraisals, market comparables, and in some cases higher vacancy and lower rents,” he says.
4. Green Your Space. Energy efficient strategies may not seem like windfall opportunities, but the benefits add up. For instance, replacing traditional interior warehouse lighting with T5 motion sensor fixtures has a payback period of two years with use of government and private tax credits, Reed says.
In addition, users report up to 50 percent energy savings. “Every dollar tenants save on energy reduces their occupancy cost as much as a dollar reduction in rent,” Reed adds. “Some owners have actually begun paying for lighting retrofits in vacant industrial spaces to improve their marketability.”
5. Lower Landscaping Costs. Landscape maintenance can wreak havoc on water and utility bills, experts say. To reduce these costs, “review landscaping against irrigation system zone design for compatibility with plant materials,” Nicholas says. “I reconfigured several zones at one of our industrial buildings where large turf areas were included on the same zone with planting beds that required much less water.” The result was significant water conservation and cost savings.
Xeriscaping, or using indigenous and low water-intensive plant species to reduce or eliminate costly irrigation, is another way to save. While using river rock or other xeriscape materials can cost up to 20 percent more than traditional landscaping, water and maintenance cost savings of up to 60 percent can be achieved, Reed adds.