Zeller Realty Group’s Herron: Property management and the power of predictable revenues

Steve Herron

Steve Herron

by Dan Rafter

During the economic downturn, commercial real estate firms were reminded of just how important their property management divisions are to their annual bottom lines. Property management, after all, provides CRE firms with the kind of stable, predictable revenues that help companies survive tough times. Now that the economy is steadily improving, property management divisions remain important to top CRE companies.

Steve Herron, principal at Zeller Realty Group – headquartered in Chicago and with Midwest offices in Minneapolis and Indianapolis – recently spoke with Midwest Real Estate News about the boost that a strong property management division can provide and the challenges and rewards of competing in this space.

Midwest Real Estate News: This is a big question, but how important are property management divisions to the bottom lines of commercial real estate firms?
Steve Herron: They are important for two main reasons. The first is that property management divisions really provide exceptional optics on the day-to-day activities of your buildings. Companies that have property management divisions have much better control of the overall execution of their assets. The buildings are well taken care of. This provides companies with property management divisions another way to enhance and display their brand. You do have institutional owners out there who will go out and hire the JLLs and CBREs of the world to manage their properties. They tend to look at their properties as commodities. Those institutional owners don’t have a true brand. Companies that have property management divisions have a true brand. They have better control over all of their services. That really helps with the ownership of a particular asset.

MREN: What is the second main reason that these divisions are so important for companies?
Herron: They are important, too, from a revenue perspective. The revenues derived from property management division are predictable. They are steady. They have become a bit of the lifeblood of the overall company’s operations. You think of investment companies. Their revenues can go up and down. Their service divisions, which property management is one of, provide that steady flow of revenue. That’s a nice bonus when you consider that property management also helps you promote your company’s brand. Those are the primary reasons that I think about when I think of companies like ourselves who have an internal property management division.

MREN: What about companies that are considering starting a property management division? What challenges should they be aware of?
Herron: When the economy slows, companies tend to look at property management. They might think, ‘If we had a property management division we could get the steady revenues. We could even out the ebbs and flows in our own cash flow.’ But as companies that have done property management for a long time can tell you, the greatest challenge is the human capital. I think of our own situation. You can say that 50 percent to 70 percent of the employees of a company are geared solely toward the property management side. You have property managers, assistant managers, building engineers, accountants and engineering personnel. You have bodies on top of bodies to run an effective property management division. As companies jump into it and think that they can just do this for a steady income stream, they miss the boat on the human capital side. They don’t realize just how many employees they need to have focused on property management to make it work.

MREN: It comes as a shock to companies just how many bodies it takes to succeed in property management?
Herron: It does. Just think of the other departments that are involved in property management: human resources, the accounting department, a legal team. Companies might not have thought about the number of people they need to run a property management division. Getting and managing the human capital is the greatest challenge.

MREN: Are there other big challenges that companies might not be aware of?
Herron: There is also the challenge of developing best practices. Our companies and those others that have done property management for a long time have really refined how to incorporate best practices into their operations. How do you execute a management plan for a property? You have so many different bodies working in property management. How do you direct them? Running a property management division is incredibly difficult to do out of the gate. The companies that have done it successfully over time have refined the process. And they have added to their best practices over time. If you don’t have a property management division that is finely tuned, it won’t be a value-add for your company. It will just be more work.

MREN: Have the services that your company’s property management division offer changed over time?
Herron: Over the years, we have added to our existing services. For instance, today energy and sustainability reviews and assessments are very important. Larger firms have a component that can generally do that service. The changes are driven by the property management team saying that we can run a better mousetrap.

MREN: How competitive is the property management business today?
Herron: It depends on the context. If you are a third-party provider, it is incredibly competitive out there. For those folks it is all about bandwidth, about total access. It’s about quantity and getting access to clients at multiple levels. As I think about how CBRE looks at the world, they need touch points. They need a lot of touch points to their clients. They’ll offer services like property management to help drive their own revenue. That is a very competitive world. For us it’s different. We provide property management services to provide better service to our partners. It’s a different type of competitiveness for us.

For us it’s about the corporate culture that you identify and create. For us, it’s about the way we do business as a whole. We all do property management in a certain way. It is part of our brand. We are a very high-touch firm. We are really focused on adding value.

MREN: Are you seeing any new trends in the property management business?
Herron: Energy and sustainability are still hot topics. Building owners are focused on how they can improve on their current systems. We can now get our engineers to see the operations of the buildings we manage in real time. We have software that gives our engineers and operational folks real-time optics on what is happening within a building. You can then figure out where you can make changes and adjustments. Any time you can use tech to better the optics on a property and make quicker decisions, you will make better decisions because of the data you have.

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