Former BBG Chairman Charles Neil shares his view on managing low occupancy buildings post-Covid-19.
Issues facing Landlords/Building Owners post-COVID Although the COVID-19 outbreak seems to be getting under control and restrictions are easing, the pandemic has nevertheless drastically altered the use of the built environment. Many non-essential office workers have been sent home to work remotely, while schools and some hotels have shuttered completely and as the economic and financial effects unfold in line with the many expatriates who live in rented accommodation will return permanently to their home countries, or the families will relocate and husbands remain on reduced salaries thus requiring less space.
As a landlord/building owner, what does this ‘new normal’ mean for your buildings? It could mean occupancy in both commercial and residential occupancy could fluctuate wildly and erratically. In the more established areas such as Karama or Bur Dubai occupancy rates have tended to hold up well in previous downturns , whereas in new Dubai there is much more movement. Whilst different levels of reductions in rental revenues are now inevitable and decreasing in real time, the one consistency will be the costs of operating these buildings and preserving them so that these do not deteriorate and can be restarted with a minimum of downtime. Obviously cost savings can take place.
A silver lining for a landlord/building owner could be that this is the time to upgrade, conduct deferred maintenance, modify, deep clean or change the purpose of a building without having to work around tenants in the building, i.e. giving them long notice periods, restrictive working hours etc. which make such improvements more expensive. Furthermore the cost of doing so will be lower as contractors will offer more affordable rates.
Commercial Considerations For Landlords /Building Owners Finding meaningful statistics is never easy but Service Charges area round AED 33 per square foot, suggesting operating costs must be somewhat near that figure. This compares well with London or Hong Kong , but rents are lower here . On average we can assume that service charges are around 25 per cent of rentals. This is fine if the building is fully occupied , but once occupancy in building drops to 25 per cent ,it will barely be covering its costs.
Probably the worst option is to continue operate a building, which is less than 40 to 50 per cent occupied with only a few tenants spread out on each floor. For older buildings that do not have up to date BMS systems to manage the energy loads the landlord has no option than to keep the common parts of the building operating at nearly full capacity so as to avoid tenant complaints of not meeting expected comfort set points and not meeting code such as minimum fresh air requirements.
During this time, it is important to maintain emergency systems and monitor operating systems to ensure energy is not wasted in empty areas
If this current rapidly evolving scenario persists, landlords/building owners will have to calculate if or when occupancy levels fall below a certain threshold whether they are not better off closing down the building altogether and keep costs to a minimum.
Revenue options for Landlords There are options for landlords/building owners who begin to feel a drain on their financial resources from such situation to consider the following.
If they are owners of multiple buildings to try and consolidate their tenants into one or more buildings which could achieve higher tenancy levels and earn a return that is considerably higher than running a number of half to empty buildings.
If they are single building owners to try and consolidate with other like-minded owners in order to maximize returns.
Financial inducements would have to be made to get tenants to move, such a paying for moving or fit out costs, maybe extra space/extra garage spaces etc. to make it worth their while, but tying the tenants in to a longer term lease and/or allowing sub-leasing options could give tenants some comfort.
Keeping buildings running while adapting to little or no occupancy
The challenge is to keep the building in the best condition to be able to re-open market demand for rental properties rises again. It is all too easy to go for a complete shutdown, but the cost of restarting it after a long period of inactivity could end up being very costly.
Change set points or operating procedures to be more reflective of a low period. Make sure set points in the building - whether for HVAC controls, lighting controls or hot water – are adjusted to reflect a low period or low load. You can also start to reverse engineer your building a bit, if your set points are constantly at a low load condition, that’s probably a sign that set points need to be lowered even further. Air blowers should be kept running but at much lower speeds .It can also be hard to keep up with your building management system if your key staff have been furloughed.
Are your emergency systems are up to date? During this time, you might not have as much access to your building as you would normally. That’s why it’s more important than ever to ensure your building isn’t left in a vulnerable position. Make sure that all emergency systems are up to date. It is vital that the fire suppression/detection systems are up to date with the inspection, testing and maintenance requirements for that system, and that your service providers are legally and financially able to carry out any work.
Now might be an ideal time to experiment with new, more efficient technology. It’s a time where you can add points to a building management system, upgrade it and start to experiment with more adaptive sequences. As a result, you could discover areas for large financial savings.
Simple examples are :
Reduce water consumption by installing water-saving devices
The Abu Dhabi Urban Planning Council’s Estidama programme already requires water-saving taps to be installed in new construction to reduce water consumption by up to 70%. Real estate developer Emaar sponsored a programme retrofitting hundreds of buildings along Sheikh Zayed Road to reduce water pressure by up to 50%. By refitting your taps, toilet, and showers with specialised equipment, you could cut your water consumption and your operating costs.
Refurbish and retrofit to increase energy efficiency
Many buildings have equipment and plant that has come to the end of its economic life. It is using too much electricity, it is taking too much maintenance time and costing too much in spare parts.
Fan and motor technology is available which are 35% more efficient than equipment installed 10 to 15 years ago.
Conclusion Serious building owners who see the downturn as being perhaps short and sharp would be well advised to put in place a reduced Annual Maintenance Contract where the building is put in to operation at least once a month and who would check say on a weekly basis for leaks and potential risk areas so that when market conditions improve the building can be brought back in to operation quickly.