Savvy property owners pull returns from their buildings’ ‘skin’
Savvy commercial and industrial property owners looking to optimise returns from their property assets are exploring extra income streams to supplement tenant rentals, with several options finding good traction in the current market.
Embedded utility networks, telco antennae, naming rights, lobby-based coffee outlets and billboard space are all examples of added value “clip ons” that a commercial building owner may be able to pursue.
Bayleys Real Estate national commercial director John Church says astute commercial property landlords are discovering ways to pull some return from the building’s “skin” or from a reconfiguration of internal dynamics.
“In the heady pre-global financial crisis days, a marble entry foyer in a commercial building was seen as a sign of opulence,” says Mr Church.
“Today, that space is more likely to be home to a café with upside for both the property owner and the café operator.
“There are many ways for building owners to ‘clip the ticket’ along the path of commercial property ownership which also benefit their tenants – such as embedded utility networks which allow cost savings to tenants, hand-in-hand with additional revenue for owners.”
Bayleys Valuations national director John Darroch says that, as the market fluctuates, so too does the perceived value of these add-ons or sundry revenue streams.
“Sometimes these ‘clip ons’ are a mechanism to cement a lease agreement; at other times they are add-value opportunities that can benefit both parties,” Mr Darroch says.
A relative newcomer to the commercial property owners’ potential income stream is embedded networks whereby owners of multi-tenanted commercial buildings essentially become on-sellers of utilities via a registered structure.
The model is applicable across shopping centres, residential high-rise developments, office buildings and industrial complexes. It is workable in both new-build scenarios and existing buildings and is compliant with industry regulatory protocols.
Murray Dyer of TENCO EBS, a utility network solutions company that establishes and manages embedded networks within commercial properties across New Zealand, says building owners are able to secure income via the smart use of their building’s electricity, gas and water infrastructure.
“The clients we are working with are benefiting from net profits of $20,000 to $100,000-plus, depending on the size of their building and the diversity of their tenant base,” Mr Dyer says.
“Nothing physically changes within the building; it’s just a new commercial contract and regulatory construct.”
With electricity, for example, under the embedded network scenario, companies like TENCO take over the property’s unique Installation Control Point (ICP), number which identifies it on the New Zealand electricity market registry. While leaving the number in the registry, they then turn the ICP operating in that property into a Network Supply Point (NSP).
“We set up a new gate meter and the building owner gets a portfolio benefit, which is the difference between the bulk connection charge and the individual tenant charge,” Mr Dyer says.
With the rise of New Zealand’s coffee culture, and a move to more sociable business practices, Mr Church says having an in-house café area for staff and client interaction can generate upward of $15,000 a year for a building owner.
“Previously underutilised lobby or foyer areas in office tower environments can become revenue-generating spaces through partnerships with established and reputable café operators.”
Bayleys Valuations Wellington director Paul Butchers says the owner of the commercial property benefits from an improved revenue stream, a more vibrant lobby or foyer which would have otherwise been redundant space, and higher tenant satisfaction.
“It’s a great solution where there is the space to bring the concept to life.”
Strategically-located commercial properties can also be prime contenders for passive income-generating billboard space, with little input required from the building owners.
ISite Media national commercial manager Frank Costello, says technological changes have increased the profiling and marketing choices available to clients and more “high-tech” options will be rolled out as new media catch on.
“Over time, there will be an increase in the number of LED digital and backlit billboards,” Mr Costello says. “We think sector growth will come through constant improvement in both assets and knowledge.”
In identifying key billboard sites, influencing factors include traffic counts, lines of sight, demand profiles, likely audience profile and exclusivity or volume of other billboards in the area. Mr Costello says sites are assessed on a rate and occupancy formula and then commercial rental levels are determined on an equitable basis.
Building owners can benefit from a passive revenue stream and an increased capitalised value of the property. Mr Costello says in a number of cases, iSite maintains the wall or ground area where the billboard is located, which also aids the landowner. In the greater part, iSite run the compliance programmes, taking on the work, cost and risk toward the mutual betterment of the property.
Another way to pull an income from the skin of a building says Mr Church, is through naming and signage rights.
“In New Zealand, costs of building naming rights are seen by some tenants as a marketing investment rather than a rental consideration; a direct advertising manoeuvre tied up with prestige, and even an element of ego.”
Generally the anchor tenant has first right of refusal as to naming rights. It is not unheard of for an anchor tenant to pay for the privilege of naming rights, yet not actually signal it publicly, simply to keep others from having the opportunity.
Typical rates for naming rights in Auckland’s Viaduct sit between $25,000-30,000 and up to $100,000 in core CBD areas, with value determined relative to position, location and comparable sites.
In Wellington, the Vodafone on the Quay building is believed to attract the highest naming rights fee in town with a six-figure annual sum. Other office towers command figures of $50,000 a year, while $20,000 seems to be a benchmark figure.