Industry recently gathered at the Metro Toronto Convention Centre for the 2015 RealLeasing Conference to share tips for increasing operational excellence amidst a market with fewer investment opportunities. Antoinette Tummillo, executive vice-president for real estate management services at Colliers International (Canada), set the stage as to what issues are prompting companies to think more about maximizing assets.
With a decline in investment activity, companies are now focusing on unlocking value from existing assets. Meanwhile, in the Greater Toronto Area (GTA), four million square feet of office space is currently under construction, with the majority 50 per cent leased or completely pre-leased. Availability peaks in the financial core, yet companies are looking for spaces in formerly unconsidered areas, such as south of the railway tracks downtown. On the industrial side, there is 1.6 billion square feet of space in Canada, resulting in absorption rates not keeping up with development. On the retail end, although places like Calgary and Winnipeg are seeing healthier shifts, climbing vacancy rates and closures are appearing in other markets. Overall, closure amounted to 17 million square feet in 2015 alone.
Operational excellence equals tenant satisfaction
Tenant satisfaction was a key theme of the panel discussion, and identified as a major factor in retaining occupancy. For David Hoffman, general manager of the Toronto-Dominion Centre (TD Centre) for Cadillac Fairview, operational excellence is a mindset in which his team is always looking for ways to improve tenants’ businesses. This foundational approach has helped the company maintain a 97 per cent occupancy rate in a 40-year-old asset.
“I think if operational excellence is done well it can look at improving revenue for the property and longevity of the property, reducing risk, improving tenant satisfaction and maintaining competitive rents,” he says.
For Nick Stryland, vice-president of portfolio management, Central Region, for Dream Industrial REIT, operational excellence is becoming more important for industrial assets as it has been difficult to increase value through acquisitions alone.
“The focus for us has been servicing our tenants as a way of unlocking value,” he says. “Our business is about customer service. If you’re not operating your buildings at a higher level, you can’t service that customer service aspect and attract new tenants and retain existing ones.”
Stryland points to the hotel industry, the Four Season in particular, as a great example of providing this high quality level of customer engagement.
“As a guest, it’s hard to get to your room without multiple staff initiating interactions to enhance your stay and forecast potential issues,” he notes. “Conversely, other hotel chains avoid guests as they have been conditioned to interact with them when there are issues to deal with.”
This “Four Seasons approach” is something Stryland tries to bring to his industrial tenants to motivate positive interactions and predict issues that can be responded to in a timely manner.
“The result of this is that we’re building trust with our tenants, understanding their needs earlier and, ultimately, improving our tenant retention and engagement and positioning our relationship with our tenants as partners,” he adds. “Part of that is operating our buildings as efficiently as possible and respecting that tenants know how to control their rental costs.”
Operating buildings as if you were a tenant paying the cost to yourself is key. When vacant buildings are acquired, Dream Industrial looks to install energy savings such as retrofit lighting to attract tenants
On the retail end, Theresa Warnaar, vice-president of portfolio management, retail, for KingSett Capital, says working through different building certifications like BOMA BEST and LEED help to improve operating practices, maintain tenant satisfaction and measure success. Recently, KingSett conducted a LEED feasibility study and found that BAS set points in a shopping centre parkade were about 10 degrees Celsius more than what they had to be.
“We dialed that back for significant energy savings, which doesn’t change the operation of the parkade, but is something you can pass on to tenants,” she says. “As we do such exercises, we’re finding these savings.”
For Warnaar, participating in GRESB and benchmarking against peers offers a roadmap in the buildings it owns. When buying properties, KingSett conducts energy audits in its underwriting from the outset, which are then passed on to tenants or to themselves depending on the lease.
“If the building is at a certain level, tenants can springboard off of it,” she says. “Also, it allows tenants to say I’m in a LEED space without moving.
Also, as part of its overall sustainability policy, the company implements recommissioning studies for its assets.
“Earlier this spring we undertook a recommissioning of our portfolio,” she says. “The BAS system needed to be recalibrated, there was mislabeling of heat pumps and set points were too narrow: Simple basic things that were easy to fix.”
After $180,000 in upgrades, KingSett anticipates $60,000 in savings and a further $90,000 no-cost scheduling changes, which is just over a one-year pay back for one shopping centre.
Hoffman connected the topic of sustainability back to his discussion on supporting tenant businesses, to help explain the “why” of Cadillac Fairview initiatives rather than simply the “what.” In its annual sustainability report, TD Centre instills transparency into its performance and uses this opportunity to demonstrate and measure how its efforts support tenant businesses and show how it is creating value.
In addition, its occupant engagement program deployed five years ago empowers its 21,000 building occupants to change their behaviour, which drives conservation results.
“This program has turned into a long-term tenant engagement approach,” he adds. “Landlord and tenant representatives are appointed by an executive leadership advisory group.”
Designed to bring tenant green programs in line with landlord green programs, this initiative enables both landlord and tenant to “sit on the same side as opposed to opposite sides” and offers a common platform to look at other tenant issues.
According to Stryland, industrial buildings are often rectangular boxes with fully net leases based on the tenants’ consumption. Dream Industrial looks for strategies to help tenants save energy, such as implementing forklift timers.
“Though it doesn’t help our sustainability, it’s helping tenants look out for their costs,” he adds. “Right now we’re assessing retrofitting all parking lots to LED with energy audits.”
When the mid-term of a lease rolls around, Stryland says he tries to tie sustainability into tenant retention by thinking proactively and suggesting, for example, lighting upgrades for two more years on a lease.
Another industrial approach to sustainability is through solar walls and panels. With 62 buildings in Ontario, Dream Industrial works with sister company DAE to identify suitable buildings by size and structural capacity that would be good solar candidates. The DAE would then lease the roof on a 20-year lease, install the solar and sell power back to the grid.
“It’s good for them and it’s good for us,” he adds. “It’s like finding a vacant unit to lease up in your buildings.”
Dream Industrial currently has seven buildings fitted with solar and plans to complete two more installations this year.