Revenue recharge

“How can this property have $150,000 in ancillary income if it doesn’t have a rooftop lease or a parking garage?” read an email from a colleague asking me to look at a property he was evaluating years ago for acquisition. Honestly, I wasn’t sure, so I did what every good asset manager would do—I called the listing broker to get the story. What was a quiet little medical office building during the day transformed into an art gallery at night. The café became a wine bar every Friday evening, and the art program at the local university displayed student art in common area hallways. They sold the pieces, and the building owner got a percentage of art and alcohol sales, netting an additional $150,000 per year in ancillary revenue.

As headlines on inflation and rising interest rates continue, we’re seeing our property owners’ returns diminish. To add to this challenge, supply costs are increasing, adding salt to our property owners’ wounds from those lower returns. With this changing environment, the role of real estate managers in finding new, creative ways to increase revenue is becoming more important. And while we’re not going to turn every building into an art gallery in the evenings, finding those additional ancillary revenue streams at our properties is becoming critical to reaching our owners’ overall investment goals.

The basics

We certainly have the standards that our industry has used for years. Rooftop leasing has been a favorite way for landlords to collect additional income for things like cell phone towers, satellite dishes, and meteorological equipment, to name a few. Another classic is parking lot revenue. If you’re already charging for parking, then adjusting the rates could increase the parking revenue a property is collecting. If you can’t charge for parking, VIP or covered parking spots can be a great way to add ancillary revenue.

Keeping with these staples, we can look at vending and washing machines. Many of these automated services take up normally unused space in your building and, depending on the location and offerings, can have decent returns.

Many property managers are already aware of these traditional models. They’ve added or continue to expand these services to generate additional property income or are increasing their rates. Now let’s turn to some opportunities we may not have seen or may not yet be utilizing at a high level.

Start with space

Jae A. Roe, CPM^®, ACoM^®, SOVA Real Estate Solutions

Jae A. Roe CPM^®, ACoM^®, president of SOVA Real Estate Solutions in Newport News, Virginia, advises looking at underutilized space to identify new ancillary revenue sources. “You can start by looking at dead or unused spaces in your buildings. These can be from the rooftop all the way down to the lobby.”

Then look at how you can monetize that space—anything from selling goods, food, and beverages to providing services. For example, Roe says that mini and micro-markets are increasing in popularity. “They’re an excellent option to look at, as they are generally unmanned retail space,” says Roe. “The advantage is that they can provide much of the same functional services as a vending machine, but this looks much more like a convenience store or the ‘in-building café’ many have grown accustomed to.”

These unstaffed stores are becoming increasingly popular. Surprisingly, there are already many operators in this space. While most companies providing these services aren’t brands the average person would recognize, others, like Amazon, 7-Eleven, and Walmart, are household names. This concept has become increasingly popular in locations with irregular hours of operation where staffing would become a concern, and we see their successful use in airports around the U.S. While there can be a learning curve or comfort issues for some, the public is quickly adapting.

Putting pets at a premium

Roe points to another opportunity for multifamily properties: offering pet services for residents. These services can range from pet sitting to complete grooming. While this might seem strange initially, according to the American Veterinary Medical Association, 45% of American households own a pet, a 7% increase since 2016. An American Pet Products Association study shows that the largest demographic of pet owners is millennials (32%). According to several studies, millennials tend to make up the largest number of multifamily residents, so these trends in pet care can directly lead to additional revenue opportunities for property owners. Pets and their quality of life have become such an important factor to many renters that entire websites are dedicated to rating multifamily properties solely on their pet-friendly policies and amenities.

Another opportunity can result from residents who don’t comply with the pet policies in place to promote health and safety in the community. “Pet waste has always been an issue on some properties,” says Roe. “Many landlords have shifted to tracking the DNA of residents’ pets and then matching any pet waste they find with those DNA records. They then charge the owner the fees to not only clean up the waste but also to cover the additional materials and labor costs.” This effort normally results in extra labor hours that can be recovered with additional fees; with these fees, owners can cover the costs, ultimately reducing overhead and increasing the NOI.

Consent fees for subleasing

“Ancillary income isn’t only about finding new revenue sources, but also capitalizing on recovering expenses or assessing additional fees,” Roe says. Consent fees for subletting or assignment of space is another trend that Roe has seen pick up since the beginning of the COVID-19 pandemic. It’s been no secret that we’ve seen a significant increase in space to sublease on the market since the beginning of the pandemic. A study by CBRE, Inc., AMO^®, found that the highest peak in the U.S. office sector was the third quarter of 2021, with 162 million square feet of sublet space coming onto the market. This has had price-conscious tenants looking for great deals, resulting in a 60% year-over-year increase in space subleased in the first quarter of 2022.

Consent fees give landlords a chance to monetize these transfers. Each transfer will typically have some legal review and expenses associated with it, which could result in increased operating expenses. Assessing a fee allows management to at least cover the expenses associated with subletting or even add some additional revenue to the NOI.

EV charging stations

Another trend we’re seeing is the use of more electric vehicle (EV) charging stations. The EV charging stations themselves can generate a small profit from those drivers looking to charge their vehicles. A much newer trend, though, is to use these charging stations for advertising. The original model was to use the charging stations to drive a retail sale. For example, consumers might see an ad for a “buy one, get one free” candy bar sale moments before going into their neighborhood convenience store.

There are other uses outside of leaving this last impression to motivate a retail sale. For example, a building occupant might leave their office building for lunch, not entirely sure where to go for their meal. Then, at the EV charging station in the building garage, they see an ad placed by a new restaurant down the street and decide to try it out. Or, as the weather shifts toward winter, the charging station has an ad for winter jackets, motivating a trip to the retailer that placed the ad. These are examples of relatively new opportunities for property managers to earn additional revenue through advertisements.

While increasing ancillary income has many positives, Roe stresses that it’s important to advise clients that additional income could have tax implications. Some ownership groups like real estate investment trusts (REITs) or nonprofits could inadvertently increase their tax liability with new revenue streams. This is something to be mindful of as you work through your management company’s strategy for increasing ancillary income.

While we aren’t going to see thousands of new art galleries opening at our properties in the coming months, there are several options to help property owners increase NOI through the use of ancillary income. So, assess your underutilized space, get creative, and share ideas with colleagues—investment real estate is constantly changing, and new opportunities for ancillary revenue will continue to emerge.