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episode # 5

How to Increase your Property’s Value Without Lifting a Finger with Warren Smithies

Are you looking to buy commercial real estate but have no idea how to take care of the property? No worries; Cory welcomes Warren Smithies CEO of Martello Group, one of Western Canada’s leading commercial property management companies, with over 5,000,000 SQFT under management. Warren walks you through the benefits of having a professional management company oversee and manage your property which will lead to increased value for owners without having to lift a finger. COVID 19 impacted landlords all over the world and here first hand what Warren’s portfolio has experienced and here how they prepare as BC is entering the first stage of the reopening plan.

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Episode Summary


 

Please tell us about yourself.

I’m the CEO of Martello Group and we’re a family business. We have offices in Alberta and BC and I have been in the business since 1988. I know property management inside and out. 

There’s a lot going on in the commercial business and it’s different from residential. The complexities make it a different ballgame. There’s a lot more to learn. That’s why it helps to bring in someone like us when you’re new to the commercial game.

There are three reasons why an investor would want to work with a management company. It removes the headaches. Our expertise helps them to maximize ROI. And we help to protect you against risks that don’t exist in the residential space. 

How is property management different in the commercial space? 

Commercial is pretty much unregulated compared to residential. There’s not a Residential Tenancy Act; it all depends on the lease that you’ve negotiated. And commercial leases are very complicated. That’s where we come in. We create a level of consistency and professionalism when communicating with tenants. 

What are the fees involved? 

This ties into how we can help maximize an investor’s ROI. Unlike residential, in the commercial space, the maintenance and management costs of the property can be collected from the tenant. Leases are collected on a triple net basis; tenants pay a base rent, but they also pay the cost of maintenance, insurance and property taxes. So you’re actually much better protected as a commercial investor. 

What does the management cover? 

It would cover regular management things like janitorial services, utilities, insurance, etc. And those numbers adjust annually. When costs increase, like they are doing right now in lumber, you can pass those onto tenants who then pass those onto their customers. So commercial investors are much better protected against inflation and rising costs, compared to residential investors. 

What challenges did covid cause in the commercial space? What asset classes were most affected? 

We do manage all asset classes across Western Canada so we have a great overview of what’s going on. Multi-family came out pretty well overall. In BC, there were rent subsidies. The office class was pretty hard hit, especially in Alberta. But our tenants have come out well; better than I expected. There are additional cleaning costs and tenant concerns about being in buildings. We’re only now starting to get back into offices. It’s been an interesting time for sure.

Did you have any problems with collecting rents on the retail side? 

Retail was an interesting one through covid. At first, it was hit very hard and many are still recovering today. There were big box stores that closed and are still sitting empty. Small mom and pop shops shut down. There were a lot of layoffs. 

But an interesting trend we’re seeing is people turning towards entrepreneurship. Especially in Alberta, we’re seeing new businesses pop up as people take the opportunity to go out on their own. So for us and our clients, they have done pretty well. We don’t have a ton of retail vacancies. 

I think the move towards entrepreneurship speaks to Canadians’ resiliency. We’re seeing it more in Calgary than Edmonton. 

Retail and office were hit the hardest. And the government response made investing in BC more attractive. Is that correct?

Absolutely. Back in March/April of 2020, we were asking the government to support landlords and businesses. And generally, those programs came through and they were effective. After the hiccup period, our clients came out whole. I feel very fortunate for how it ended up shaking down. 

We know there’s high demand in the industrial space. Was that asset class the least impacted by covid?

Industrial is like a fortress. You could invest in that asset class and I don’t see how you could lose money at this point in time, from a management perspective. There’s so much demand and such a short supply of space. That asset class has been very strong.

The Metro Vancouver market is definitely the strongest; Edmonton is weaker as there’s a bit of an oversupply. Calgary is quite resilient. 

When should someone bring on a property manager? 

The earlier someone works with us, the better. We can provide insight during the early part of the process, especially if this is a first purchase and they don’t have the experience. Once you have an LOI (Letter of Intent) in place, you should engage us. We would not charge fees at this time.

A note on LOIs by Cory: 

Some landlords ask for an LOI (Letter of Intent) before a PSA (Purchase and Sale Agreement) as PSAs can be very long and complicated. The LOI is where you would tell the landlord what you want to pay and your terms and conditions. If they feel that you’re in the same ballpark, they will then negotiate that into a PSA. It’s a common practice in commercial when you’re dealing with larger landlords or larger buildings. 

Are management fees always passed onto the tenant? 

It’s extremely rare that tenants can negotiate those terms. For example, government tenants may be able to negotiate those terms as they have excellent credit quality. But it is standard in the industry to have the tenants pay those fees. It’s only in very rare situations where the tenant could limit their costs per year. 

How often do you see people trying to manage properties by themselves?

Some investors prefer to have the tightest control of their operations as possible. Some people feel that delegating is not best for them. But that’s the only time we see people going it alone. We always recommend an investor work with a manager. If it’s not us, it should be someone else. There’s a level of complexity that exists in the commercial space that doesn’t exist in the residential space. That’s where value is lost when investors leave money on the table.

How does Martello Group remove headaches for owners?

Like in residential, commercial tenants are demanding. They want regular communication with their property manager. Properties need to be properly tended to. Emergencies happen, like pipes bursting at 2:00am. If you’re an investor, you don’t want to be handling those things yourself. We take care of all of that for you. We have dependable trades with pre-negotiated prices. We take the pain out of working with tenants.

Screening is huge. We make sure tenants are of quality. The last thing you want to do is sign a 10 year contract with a tenant who goes bankrupt in three. 

There are a lot of costs involved in finding and placing a tenant. If you’re not screening and you’re turning over tenants every few years, your costs may be outweighing your profits. Bringing in professional management is like an insurance policy. I can’t imagine a better time for having a management company in place than covid. 

Covid was the most challenging situation our industry has faced in my career. We actually gained clients as individual investors couldn’t navigate the process themselves. We developed systems to navigate the programs, cleaning, etc. It brought to the forefront the value add of having a professional manager. 

Where are the best investment opportunities? 

There are opportunities everywhere. In my mind, price matters but growth also matters. Vancouver Island and the Greater Vancouver Area are big growth areas but prices are high. Are the prices worth the growth? I don’t know. The interior is also growing very fast with relatively good value. If you look a bit farther, you may find better value but it might be lower growth. 

If you were to buy one commercial property, what property would it be and where?

It’s hard to pick one. The last place we put our capital is in the Okanagan. We feel there’s growth there and we see the value. 

As an investor, can I be more hands on or hands off with my property manager?

Yes, we’re very customized. Some of our clients want to interact with their manager on a daily basis, and that’s fine. They want to have final say and be very involved. And we have other clients who are international and only ask for a quarterly statement. We can go either way. 

What advice would you give to someone starting their commercial real estate journey?

Make sure you have a good team on your side before you make a purchase. They will add so much value and protect you from situations you can’t even see. 

Find out more: https://www.martello.group/

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