Walking through the Chateau de Versailles as a fresh, energetic twenty-something, I couldn’t help but be struck – as everyone is – by its grandeur. Bedrooms dripped with gold, vaulted ceilings soared seemingly miles above, and pristine gardens stretched as far as I could see. My word, I thought, Louis XIV must have charged a mind-boggling square metre rate to lease an office corner in this place.
Louis XIV did, however, have the somewhat uncommon advantage of being the King of France. Presumably, his budget for such things as air-conditioning maintenance and lift upgrades was effectively limitless. Presumably, as the new owner of a commercial office building in a tight Sydney or Melbourne market, yours is not.
Yet whereas Louis could simply behead his tenants if they complained, there is significantly less wiggle-room for owners these days. Tenants are the occupiers of a building, and they expect a certain standard in return for their money. But in the fight to cut costs and deliver a few extra basis points of IRR, their happiness is often a secondary concern.
It shouldn’t be. Louis XIV may have been King in the 17th Century, but for commercial property owners in the 21st, tenants reign.
Why prioritise your tenants’ happiness? Because in the end, their happiness is also your own.
Peter Hurley, Managing Director of Aspire Strategy, a boutique real estate funds manager, recalls a previous office investment. His firm thought outside the box to win over new tenants, and ultimately bump rental income above expectations.
“As part of our due diligence, we learned that the outgoing owners had a number of existing and potential litigations, and had actually allowed cash in their forecasts for future legal costs.
To avoid a similar level of tenant-management tension, we wanted to start off on the right foot. Virtually the day after signing the contract, we had a team go in after-hours to make immediate changes and carry out much needed aesthetic repairs. By morning, light bulbs were changed, public foyers had a coat of fresh paint, and new pot-plants breathed life into the previously bare corridors.”
Peter notes that it was their insistence on carrying out immediate maintenance, without having been asked to by tenants, that became the foundation of a relationship quite different to that with the previous owners.
“When it soon came time to meet with the tenants in the newly acquired property, most were quick to comment on the new look of the building. It provided a good base on which to establish a level of trust with tenants, that we did have their best interests in mind.”
Peter says that this is a cornerstone of his commercial office strategy. Keeping tenants onside not only minimizes the chance of costly litigation – at a more basic level it incentivizes tenants to stay. Sitting tenants re-signing a lease are more like to pay better rents, as they don’t incur the upfront costs of moving. Those that believe their offices will continue to be presentable to their clients are especially inclined to do so.
Yet throwing cash at a building is not going to boost your returns come divestment. Targeted, cost effective maintenance is instead required to deliver a workable space, yet simultaneously maximize operating profits for the asset. For increasingly discerning tenants, targeted means spending on four key areas.
- The Face. Not to be confused with the entire façade, the face of a building is simply the immediate front that anyone will see when they approach and enter the premises. Tenants want this to be clean, modern and understated – a reflection of their business.
- Toilets. The last thing you want as a business is for your clients to use an old, dirty bathroom. Clean and sparkling tiles will leave your tenants with little reason to complain.
- Air Conditioning. There’s nothing better than walking into a crisp, chilled office on a hot summer’s day. Make sure the aircon doesn’t rattle, annoy, or spill water all over a workstation whilst it’s doing its job.
- Lifts. Sometimes a big capex expenditure, lift maintenance is crucial nonetheless. Regular upkeep and upgrades of lift interiors can ensure you maximize the lifespan of costly back-of-house lift systems.
Maintaining these elements of a building goes a long way toward painting your company in the best light possible for your tenants. It’s a management strategy on which Aspire Strategy prides itself, and one that has enabled Aspire’s Directors to deliver maximized returns again and again. Money spent in this way is far from money wasted, and happy tenants are often key to a successful investment strategy.
So whilst your coffers might not be as deep as Louis’, showering a little gold over a building goes a long way. Deference to royalty has always been smart business, and Tenant is King now.
Aspire Strategy is a boutique real estate funds manager that prides itself on an individualized and personable approach to investment management. We’re combining extensive experience and know-how with an appreciation for investor sentiment, to deliver an experience that defies the cookie-cutter style of big instos and long-standing players. Dream big. Aspire.