Occupier Update M/L

We know these continue to be exceptionally difficult times for each of our occupiers.  Daily, you are facing decisions to prioritise expenditure and protect revenue.

Many of you are caught with the uncertainty of not knowing how long these conditions will last and, as we know from the hundreds of calls we have fielded with our occupiers and suppliers over the last fortnight, this uncertainty is creating the greatest difficulty of all.

Every team at MAPP is making a monumental effort to respond to the shifting requirements of this crisis and emergency planning needed for every stage.  We have been working closely with our clients and collaborating closely with industry counterparts and suppliers to ensure our site teams can keep buildings both operational and safe.

Since our last update on 30th March, our focus has been shifting from operational support, remote working and decisions around keeping buildings open to cash flow, cost control and mitigation.  We summarise the actions we are taking below:

  1. Keeping buildings open

Previous notes have explained why nearly all of MAPP’s buildings have been kept open or in the case of retail, partially open.  In doing so, MAPP equipped site-based and roving FM staff with letters of authorisation, to enable them to travel to sites.  With a few exceptions, this policy has been successful.

  1. Keeping buildings safe with reduced staff

Achieving statutory compliance has meant adjustments to many of our working processes as our buildings adjust to partial occupancy, reduced site teams, or in some instances moving to being ‘unmanned’ through furloughing or other prolonged absences.  Our FM teams have adjusted all of MAPP’s working procedures to respond quickly and effectively to these revised requirements including, for example, contractor management processes or fire and safe evacuation processes.

  1. Staff cost management

Retailers are asking for costs to be reduced to near zero. We, as with other agents, have respected Revo and PMA’s ongoing dialogue.  In so doing, it has meant taking a coordinated response to retail tenants across the board in terms of rental payments and service charge reductions.  The actions we have taken (around keeping centres safe and secure, for example and re-forecasting service charge budgets to remove non-essential spend) are in line with Revo’s position, and our Retail teams continue to influence and follow industry guidance.

Retailers are pushing hard for site teams to be furloughed, and for those on furlough to be paid the minimum.  Some of our clients are instructing that full top ups should be paid and recoverable from the service charge. We are recommending that everyone that is furloughed should receive 90% of their salary up to £37,500 and 50% after that.

Across the property management industry, generally, FM and operational staff are not being furloughed.  This is because statutory inspections and compliance are still required and FMs support the scaled-back operations.

Other sectors are pushing but not as hard.  Generally, we are finding our clients not wanting to follow suit and are focusing instead on supporting the site team, the supplier base and the property management team.

  1. Reducing budgets

Although each building will be different, there are some common themes of areas where costs have been scaled down or removed.  MAPP’s FM teams have been given a cost reduction template of 60 areas for consideration.  These generally fall into two categories – discretionary or non-essential spend which can be stopped, or measures to increase the natural reductions arising from lower occupancy.  Examples of these are shown below:

Discretionary spend and non-essential contracts have stopped.  These adjustments include:

  • Cancelling marketing, advertising and promotional activity
  • Suspending sinking fund recoveries or provisions for future expenditure
  • Withdrawing/deferring major works
  • Confining M&E/fabric maintenance confined to essential works only, in some instances scaling back of contract maintenance and PPM.
  • Window cleaning

Natural reductions are arising with occupancy-related costs.  For example, reductions in:

  • HVAC operating times
  • Transport services to and from site
  • Reception, front of house and customer service teams
  • Waste collections
  • Utility consumption

To benefit from reduced energy bills, our teams are ensuring that meter readings are submitted to the suppliers reflecting the new reduced power draw. Energy prices are comparatively low at present, with some markets currently 15% down.  We are making sure that contract renewals during this period take advantage of these.

More meaningful cost reductions will only be achieved through a reduction of man hours or in staff needed. It may be impossible to achieve the reductions that we are likely to require without loss of jobs – however, where loyal service has been given for many years, we are doing everything we can to reallocate or repurpose those individuals’ roles to areas that are still needed.

For some the decision is easy, many have childcare responsibilities, many are more comfortable not working during this time and we are trying to ensure where possible that the people working on our sites are comfortable doing so.

There is an expectation that costs can be adjusted in ‘real time’.  The majority of service charge expenditure is incurred from supplier contracts where termination provisions are still contractually binding.  Force majeure has been mistakenly understood as a mechanism for service cessation.  It is not, and instead we are exploring the angles of contract frustration.  So whilst service requirements may have fundamentally changed, the contract liabilities have not.  MAPP is therefore working with its suppliers on portfolio-wide solutions to enable cost savings to be released where possible and for the benefit of savings derived from furloughed staff to be felt by the service charges.

  1. Decommissioning buildings

Initial conversations about switching everything off and turning it back on again when we return to work are working their way through.  MAPP’s position is that decommissioning should only be the last resort.

Whilst it will save energy costs and allow engineers to be stood down, it has significant cost implications further down the line.  Re-commissioning plant requires specialist support, water supplies will need to be chlorinated and with contamination arising from biological activity in closed water systems left idle over summer, these costs will be considerable.  Lifts are designed for frequent, regular use. The impact on lift machinery, parts, ropes and shoes from prolonged inactivity may cost more than the energy savings.  And when the engineers come back, invariably they will have been redeployed to other sites with loss of site knowledge. For complex buildings with complex systems, that’s material.

  1. Security

From watching other countries who are ahead of us with the implications of restricted movement, there is a very real and escalating threat of increased criminal activity.  The requirement for security has been further strengthened this week by the new court directives which prevent anyone from filing proceedings at the County Court for any possession claims until 25 June at the earliest. This includes squatters and aggravated trespass.

This will have a significant impact on security and how we manage intruders moving forward and we are looking at where we need to consider more robust security options on high risk vacant properties, out of town retail, industrial or business parks.

We are monitoring Insurer requirements for these assets.  Previously, Insurer requirements included concrete barriers and alarm systems.  These measures are now shifting to securing fire escapes and windows with steel sheeting, additional security guarding and dog patrols.

  1. Reduction of on-account service charge budgets

Generally, we are not adjusting budgets or on-account payments.  Like you, the decisions we make for a few weeks are materially different to those which will last for several months.  But timing isn’t the only factor.

At this stage, none of us know how long partial occupancy will last or the consequences of it on building systems and plant.  Plant such as lifts, air conditioning are designed for continual use; without continual maintenance, low use tends to give rise to failure.  Our FM teams will shortly be working through critical spares for their sites to minimise this down time, particularly as we envisage a run on supplies with a relatively small number of manufacturers such as Otis, York etc.  These spares will inevitably need to be paid for up front.

The question we face is whether it is better to have a 10% saving handed back, or a 10% contingency for when we come out of this?  A 10% saving isn’t going to materially prevent the painful decisions you are having to make on a daily basis.  It is however going to make the difference when those buildings come back up to full load as we’re released back out to live, shop and work as we never have before.  Not only will systems be coming back into use, but they will be tested at full speed and have a higher probability of failure.

If you have any questions about your property, lease or the arrangements we are making, please don’t hesitate to contact your surveyor.  These are extraordinarily tough times and our preference is to collaborate with you, share information and be transparent in handling the difficulties we all face.