As we stand on the threshold of 2024, reflecting on the 2023 commercial real estate (CRE) landscape reveals substantial trends that have reshaped the approach to Common Area Maintenance (CAM) charges. Let's take a look at these trends and practical strategies to help you effectively manage CAM charges in the coming year.
2023 Market Trends Impacting CAM Charges
1. Investment Volatility and Yield Sensitivity: According to cbiz.com In 2023, the CRE sector experienced fluctuations, with NNN sales volumes initially plummeting but later showing signs of recovery. Investors demonstrated increased sensitivity to yields, adjusting to rising interest rates and seeking properties with elevated cap rates and strong tenant profiles†.
2. Heightened Focus on Tenant Quality and Lease Durability: Amidst market uncertainties, investors prioritized tenant quality, long lease terms, and strategic locations. This shift towards stable, long-term investments was evident in specific sectors like car wash deals, which gained popularity due to attractive lease terms and tax benefits†.
3. Rising Operational Costs and Inflation Challenges: The persistent inflationary environment in 2023 continued to drive up operational costs, compelling adjustments in CAM charges to accommodate the increased costs of services and maintenance†.
4. Construction Inflation and Escalating Insurance Premiums: High construction costs, resulting from labor shortages and expensive materials, led to significant hikes in property insurance premiums. This trend exerted additional pressure on CAM budgets, especially in regions with higher inflation rates†.
5. ESG Factors Driving Investment Decisions: Environmental, social, and governance (ESG) considerations increasingly influenced CRE investments. The focus on sustainability and social responsibility, accelerated by global events, is expected to continue shaping investment strategies and operational costs†.
Strategies for 2024
1. Enhanced Communication and Transparency: Emphasize clear communication with tenants about CAM charges, ensuring they understand the rationale behind any changes. Send letters as early as possible in the new year if CAM estimates will be adjusted so tenants have ample time to make the change.
2. Leverage Tax Incentives for Energy Efficiency: Utilize incentives like those in the Inflation Reduction Act to invest in energy-efficient improvements, balancing initial costs with long-term operational savings.
3. Risk Management and Insurance Strategies: In response to rising insurance costs, reassess risk management strategies and explore more affordable insurance options to mitigate the impact on CAM charges. Insurance policies tend to include built in increases and may need to be sent to market in order to shop current rates bringing the premium back inline with more competitive rates. It is imperative that you know your property prior to taking this step. It can also have the reverse effect and cause premiums to increase even more if switching to a new company where an inspection may be required.
4. Aligning with ESG Trends: Integrate ESG practices into property management to meet evolving investor and tenant expectations, potentially increasing property value and attractiveness. Consider adding EV Charging stations as an additional revenue source to offset CAM expenses.
5. Strategic Tenant Engagement and Lease Management: Focus on securing reliable tenants and offer flexible lease terms that align with the current market trends to reduce financial risks and enhance property stability.
6. Proactive Property Maintenance: Maintain a proactive approach to property upkeep and improvements, controlling CAM costs effectively while ensuring the property's appeal and competitiveness.
As we approach 2024, the lessons from 2023's dynamic commercial real estate market provide valuable insights for managing CAM charges. Property owners who adapt to these trends and implement strategic measures can effectively navigate the challenges, maintaining strong tenant relationships and positioning their properties favorably in an evolving market. This proactive and informed approach is key to sustaining the financial health and competitive edge of commercial properties in the coming year.
† https://www.cbiz.com/insights/articles/article-details/our-top-6-commercial-real-estate-concerns-from-2023