Target Maintenance, Repair, and Operations Savings to Maintain or Increase Property Values in Late Cycle
Aug 5, 2019

MRO_CostSavingsCommercial real estate has enjoyed strong rent growth and appreciation since the Global Finance Crisis (GFC). As the real estate cycle matures, analysts have predicted lower growth and moderating real estate returns. To maximize late cycle returns, real estate investors must focus on increasing efficiencies through reducing costs.

Qmerit provides the technological solutions that identify cost-saving opportunities that were impossible to find until now.

Real Estate cycle nearing plateau

Commercial real estate has enjoyed rapid appreciation over the past few years. Low vacancy rates, low cap rates, higher rental rates and increased demand, especially in central business districts, have kept prices on the upswing. Commercial real estate prices continue to maintain healthy levels, but the rate of appreciation is anticipated to slow.

As the real estate cycle continues to mature, analysts predict continued slower growth rates, reduced rent escalations and moderating occupancy rates.

This begs the question: What can commercial real estate owners do to keep their values on the upswing?

Just because we're late in the real estate cycle doesn't mean real estate valuations cannot continue to rise. Owners need to think outside the box of of traditional real estate valuation levers. Now is the time for owners to be vigilant and hyper focused on lowering operating expenses

When expenses are reduced, return on investment (ROI) can increase with far fewer out-of-pocket dollars on the owner's part.

Lowering expenses for building owners

Maintenance, repairs and operations (MRO) expenses eat into profits and reduce property valuation. When the market is hot and building owners are focused on making ROI boosting capital improvements to properties, the ongoing MRO expenses have gotten comparably little attention.

Now that the market is reaching maturity, tenant improvement costs and other property operating expenses will create an additional lever for creating alpha and generating higher returns.

Qmerit's unique platform gives owners visibility into the availability and performance of qualified contractors. Building owners use the platform to select the best contractor for each job. They see important criteria about each vendor, including past performance, responsiveness, quality rating and compliance. Selecting the best vendors, as all building owners know, has a direct positive correlation with happier tenants. Happier tenants are more likely to renew leases.

Building owners also benefit from Qmerit's procurement system. All Qmerit customers purchase the ongoing MRO parts and materials through a cost-cutting buyer aggregation system. They enjoy the benefits of discounted prices unavailable to single buyers by leveraging the collective aggregated spending of building owners, contractors and property managers.

These cost-saving measures go straight to the building owner's bottom line. In fact, buyer aggregation programs reduce these ongoing MRO expenses by 7-25%.

Higher prices resulting in lower cap rates

Capitalization rates have historically, on average, been at 7-9% depending on location and property type. In today's market, they are closer to 4-5% for a variety of reasons. Luxury residential buildings in large cities provide a great example. These properties have seen a huge surge in valuation, leading to low cap rates.

Demand for commercial real estate properties among investors remains strong. Many real estate investors are buying properties at higher prices, and this has resulted on cap rate pressure and thus the lowering of c cap rates. Low interest rates continue to fuel this demand.

Yield-starved cash (including cash in pension funds) is causing "bid ups" in real estate pricing because other investment alternatives (e.g. stocks, bonds, treasuries, cash) are unattractive at these price points or are likely in bubbles of their own.

Lower cap rates naturally lead to more scrutiny of MRO expenses. Investor demand may be strong, but rental demand has plateaued in many areas, putting further pressure valuations. Real estate investors are now reducing operating expenses as a way to increase the bottom line.

Revolutionize procurement with Qmerit

Qmerit identifies MRO savings opportunities and leverages buyer aggregation programs to increase their net operating income by 7-25%. These MRO savings are exceptionally valuable, especially considering that once cap rates reach 4%, each dollar saved on MRO adds $25 to the property value.

Although the market is maturing, plenty of opportunity exists to boost property values and income, even if rental demand stalls. Property owners who make the small investment in Qmerit's MRO savings and price aggregation programs stand to profit up to $25 per $1 saved. All of this is done at no cost to the property owner.

Qmerit uses software automation to identify cost savings opportunities and merge buyers into a unified group with substantial pricing power. Visit Qmerit to learn how you can overhaul and improve your procurement process.

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