It’s budget season – how good is your leasing forecast?
It’s one of the busiest seasons of the year for property managers! Not only are we planning holiday functions and finishing up current year projects, but we are also attempting to accurately forecast next year’s operating budgets and cash flows. To be successful in this process, we must rely on many sources of information.
The project leasing team is one of the most important sources for budget information. Property managers rely on brokers to provide accurate projections of leasing activity for the coming year. Why is this source of information so critical?
- The most obvious reason is the impact on projected revenues from proposed leasing activity. Owners and property managers approve or defer capital and operating R&M projects based on the anticipated income from lease renewals and new tenant leases. These leasing projections also impact the property cash flow due to budgeted tenant improvements, commissions, and other expenses associated with the anticipated leasing activity.
- Another important impact is the decision‑making process around rental rates. For low‑occupancy properties, an owner may choose to budget and accept lower rental rates in return for higher occupancy. This trade‑off may be justified when the owner’s share of operating expenses is significantly reduced by increased occupancy.
- Certain variable operating expenses such as utilities, management fees, janitorial, … are directly affected by projected increases in occupancy. These expenses, in turn, are used to calculate tenants’ share of operating expense reimbursements, which are billed in advance each year. Reliable leasing projections allow for more accurate tenant reimbursement billings.
For these and many other reasons, property managers need a reliable leasing forecast.
In our experience, there are several different broker leasing projection styles. Here are a few that stand out:
- First, there is the broker with the crystal ball, whose leasing projections seem to be dead on year after year. They have worked the property for so long they know the tenants, the trends, and the building, and can successfully project leasing activity with strong accuracy year after year. I won’t lie…property managers love that broker!
- Next, there is the broker who consistently provides overly optimistic leasing projections. To overcome this style of forecasting, it helps to have a solid relationship with the property manager and collaborate on these projections. Armed with current market information and recent property leasing activity as support, realistic, not overly optimistic, leasing projections are the better approach. We know owners may not like what they hear, but they usually appreciate the honesty and transparency when they understand the challenges you face as their broker.
- Then there is the broker who “under promises and over delivers”. Of course, over delivering is not a completely bad thing – it’s the “under promising” (or, more accurately, underestimating) that causes the issues. The problems associated with unexpected new leases are manageable, and most would agree it’s a good problem to have. However, each new tenant brings capital expenses such as tenant improvements and leasing commissions that are paid up front and have an immediate impact on cash flow that should have been included in the budget. Again, owners prefer a realistic understanding of what to expect from their leasing team. Temper it a bit if necessary…but try and be as accurate as possible.
Regardless of your style, more accurate leasing projections are the ultimate goal.
Here’s to meeting your leasing goals next year!
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