An Unsettled State of the Industry
Oh, what a difference a year makes. December 2000 seems like an eternity ago. Since then, our markets have tightened. The fall out of the September 11 tragedy continues. Less than two weeks after the terrorist attacks, the stock market dropped nearly 15% recording the largest weekly decline since the great depression. The news is not good and the message continues to be bleak. The "R" word (recession) is once again rearing its ugly head. At the Property Management Association's Annual State of the Industry address Jay Olshonsky, managing director of the Washington offices of CB Richard Ellis outlined a market in transition. He stated that the key factor for everyone in our industry to watch is job growth. Job growth is the harbinger of economic forecasting.
From 1996 to 2000, Northern Virginia led the nation in job growth, creating a total of 60,000 new jobs. Given the tremendous growth in jobs in the Northern Virginia region, it should come as little surprise that the area ranked in the top three office development regions in the nation from during that time. The telecom and dotcom boom that created unprecedented returns is now causing real estate growth to come to a grinding halt in many markets. As a result, vacancy rates are going up and rental rates are dropping.
Even though markets are changing, many who have enjoyed the spoils of an unprecedented real estate boom for the past 10 years are in denial. In many areas, the picture is very weak. It's not hard to figure out that if you are laid off, that means you are fired. In the Washington area and elsewhere around the country, former technology employees were holding pink slip parties attracting 400 to 500 people at a time. And that occurred before September 11. Since then, the massive reductions in force of 10, 15 up to 30% of workforces have become commonplace front page news.
The jobless rate nationwide is the highest its been since 1997. More than 600,000 jobs nationally have been lost. No jobs, no spending. One real estate company executive stated that in his firm he assembled all of the employees to ask which third are you in. His point was one third of the staff are doing great. Another third will be let go due performance and economic conditions and the final third need to determine which third they are in. That scenario is not an exception. It's belt-tightening time for the industry.
But the news is not all bad. Intel's CEO Andy Grove likes to say that, ñThings are never as bad or as good as they appear.î The good news is some analysts think that the stock market is nearing the bottom. ñHow much lower can it go?î Another factor contributing to a more rosy picture of the many markets is the fact that they are not over built. There are deals being made. Granted they are not at the highest rates commonplace a year ago, but space is being leased. New products are coming out of the ground. Even spec building in some markets is continuing, namely the central business district of the nation's capital. In fact, the Washington, DC CBD remains one of the most stable and best performing markets in the country. With occupancies remaining above 97%, Washington is attracting the attention of national investors. .
As the market tightens, property managers are advised all managers to focus on customer service. Know who your residents, tenants and vendors are. Ask them what you can do to help. There are a lot of people who are hurt and grieving. Competition is going to increase. Words are cheap. Deeds speak volumes. Make sure your tenants, residents, vendors and owners are happy. Look sharp and be sharp. Develop contingency plans for your properties in the event of continued bankruptcies and contractions. What will you do if a major tenant wants to give back space. How will you fill it? What type of emergency evacuation plan do you have. Guaranteed, every tenant and owner that you interact with is thinking about it. Dust off what's on the shelf, update it and let those who are affected know what you will do it the event of an emergency.
It's also time to take a hard look at their personnel. Hire the best, attract the best motivate and reward the best with the highest pay and benefits that you can afford. You need the best people you can afford especially at the lower level positions.
The same attention to personnel needs to be paid to your properties. When markets head south, now is the time to return to basics. Make sure that systems operate as they are designed. Be proactive to help assure that the curb appeal is what tenants and owners expect and deserve. Focus on the cost factors that you can control the most. Energy remains a wild card, especially if you operate in deregulated states. If you don't have the load data needed to make intelligent purchasing decision in a deregulated market, then partner with utilities and/or outside consultants that can collect that data for you. Carefully examine every utility bill to assure that you are paying the correct rate and that the bill is consistent with past usage. Look into simple but cost-effective energy management systems that can lower consumption without compromising thermal comfort or lighting quality.
Finally, do not underestimate the competition. Olshonsky stated that in his region, CB Richard Ellis has 6 million square feet of office space under contract to manage. The company's goal is to reach 25 million square feet. Management fees are recurring income. Brokerage commissions are not. The competition will intensify. Be prepared, be safe and be careful. There is an old oriental curse, "May you live in interesting times." The days to come are very likely to be most interesting.
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