2020 Has Blown Operating Budgets
Asset managers who entered 2020 with fixed budgets for maintaining building health and security are facing a deluge of unplanned operating expenses stemming from the coronavirus pandemic.
Property management costs associated with improving health and safety inside office properties could push operating expenses in the asset class up by at least $19.40 per SF, according to a Deloitte study.
As a result, asset managers in the office sector and other CRE classes are revisiting and reprioritizing their operating budgets.
"There are some immediate upfront costs associated with operating a building [now], with the creation of sanitization stations, touchless entry and foot-door entry [technology]," CBRE Senior Managing Director Mark Nicholson said while speaking at the Bisnow webinar Preserving Value in Assets.
"Those kind of things are going to be a one-time cost," Nicholson added.
These one-time costs range from the inexpensive to the expensive, he noted.
One area where building expenses may run higher is in the cost of maintaining safe indoor air quality. Many asset managers are now having to determine whether interior health concerns require the implementation of MERV 13 air filtration installations, Nicholson said.
"Those are going to be more expensive," he said. He recalls one DFW-area asset manager receiving a $20K to $30K estimate to install MERV 13 air filtration technology inside one commercial building.
With all of these new costs hard to pin down, asset managers are having to reconcile old operating budgets with new property demands.
"From the ownership side, we have definitely evaluated the difference between wants and needs in regards to expenses," Duke Realty Corp. Regional Vice President of Asset Management Christy Vasiliou said.
"We eliminated all of the wants and focused on the needs of the property and reduced unnecessary expenses throughout the portfolio."
Even though industrial asset managers are forced to stay on top of capital deployment in a tough environment, facilities in the sector require less TLC in the wake of the pandemic compared to other asset types, Vasiliou said.
On the other hand, retail is still reeling from a summer plagued by the coronavirus and civil unrest and both of these sudden eruptions placed a greater focus on asset security.
"We didn't want our [retail] centers to look like they were vacant, and there were concerns over security within the centers themselves," Weitzman Director of Property Management Sandi Scott said.
As a result, security costs within various retail centers went up in 2020 even as the pandemic was pushing traffic levels down, Scott said.