When I teach real estate courses, I often refer to Net Operating Income (NOI) as the “Holy Grail” of managing and owning a commercial property. NOI is the income figure that the property produces for the owner after all expenses are paid. Why is so important? It’s the figure that will drive your returns, how much you can borrow and ultimately, the cash flow to the investor (Check out this blog post that breaks down NOI and how to calculate it more fully).
So, if NOI is so important, what are some things a commercial real estate owner can do to ensure they are maximizing it? Below are some proven strategies and plans to consider when working on your NOI.
- Increase Occupancy Rates and Rent Levels
Yes, this is obvious, but in many cases, we find that owners are not doing comprehensive market analysis when they are leasing and renewing tenants. It is critical that owners understand market rents and occupancy levels, so they make informed decisions about what lease terms to offer.
- Consider Other Revenue Streams
Depending on the property type, there may be opportunities for owners to add revenue streams. If you own multifamily, perhaps you could consider bundling high speed internet or adding a laundry facility. In an office building, could you offer common conference room rentals, shared workspaces, vending machines, or fitness facilities. In a retail property, perhaps there are opportunities for additional advertising, billboards, or murals. In any property, a cell tower could help. These are only some of the many opportunities that could be available to enhance revenue.
- Manage and Reduce Operating Expenses
While this may also seem obvious, on countless occasions we have worked with owners who have not bid their vendor contracts in years. In the same way that it is important to understand the market for rents and vacancies, it is equally important to understand what competitive pricing is for all vendors providing services to the property. Competitive bidding can help lower costs without compromising on quality.
It is also prudent to evaluate and implement energy efficiency measures. Utility expenses can eat into NOI if not managed properly. By upgrading to energy-efficient systems such as LED lighting, smart thermostats, and energy-efficient HVAC units, you can reduce operating costs significantly. Also, consider installing solar panels or switching to low flow plumbing fixtures to cut electricity and water expenses.
Finally, implementing a robust preventive maintenance plan can help you avoid costly repairs in the future. Regularly maintaining HVAC systems, elevators, plumbing, and electrical systems can extend their lifespan and reduce the risk of expensive, unexpected failures.
- Improve Lease Terms and Conditions
It is also prudent to understand if your property and market will allow you to shift your lease document more towards Double or Triple Net Leases (NN or NNN). Transitioning some or all of the operating expenses (taxes, insurance and common area maintenance—TICAM) to tenants (as additional rent) will help further mitigate any erosion of NOI. This can be done in all property types and is even common in full-service office leases where it is handled as an expense stop pass through.
Once you have transitioned your leases, ensure that you are recovering all allowable expenses for TICAM by doing annual reconciliations and true ups with your tenants. Tenants should be responsible for their share of these costs, so make sure that TICAM charges are structured and enforced correctly in your leases.
- Upgrade and Improve Amenities
Understand if there are places where your property is lacking in amenities and how much that may be costing you in potential rent and occupancy. We often find that a fresh coat of paint, improved landscaping, or new signage can make your building more attractive to potential tenants, allowing you to command higher rents. Upgrading common areas such as lobbies, and restrooms, or even adding outdoor seating areas can create a more desirable environment.
Also consider leveraging technology. Offer tenants technology-enhanced amenities like secure access control systems, high-speed Wi-Fi in common areas, or smart building technology that allows them to manage heating and lighting through mobile apps. Not only will this improve tenant satisfaction, but it can also justify higher rents.
- Build Strong Tenant Relationships and Proactively Manage
Keeping quality tenants for the long term is one of the best ways to ensure stable income. Communicate regularly with your tenants to understand their needs, address concerns promptly, and offer incentives for lease renewals, such as small improvements or flexible terms. Proactive management can prevent issues before they become costly. Regularly scheduled meetings with tenants, swift responses to maintenance requests, and maintaining a clean and safe environment will improve tenant satisfaction and retention, reducing vacancy and turnover costs.
To conclude, enhancing the Net Operating Income of a commercial building is about maximizing revenue streams and minimizing expenses while maintaining tenant satisfaction. Yes, it is a balance and easier said than done. However, by implementing these strategies—whether through better lease structuring, adding new amenities, or cutting operational costs—you can increase your property’s profitability and long-term value. Investing in improvements today can lead to a more resilient asset, attracting and retaining tenants while improving the bottom line.
Want to know more? Please give us a call and we can discuss the specifics of your property!
