Briefings Business Issues

Creating Opportunities Out of Adversity

The anxiety resulting from COVID-19 is a barrier that must be addressed and overcome to find the opportunities and succeed.

Planning in the commercial real estate industry is a challenging, time-consuming process even in the most uneventful years, let alone amid a global pandemic. COVID-19 has influenced virtually every part of our lives — including how people see real estate footprints. Well into the second half of 2021, the best CRE firms are focusing on securing tenant and client retention as a way to maintain growth and move forward. But despite the desire to proactively increase business, it’s important to keep in mind that many potential industry-wide changes are still on the horizon that require firms to remain nimble when planning. With that in mind, understanding key considerations can help position you for success in the current marketplace.

Create a Flexible Business Strategy

A sound business strategy is critical to any commercial real estate firm’s success, but a defined strategy should be revisited often. Now is the time to review operational and financial goals and plan for where the industry is headed in your market. A properly designed strategy is flexible and weaves the core mission into the monthly, weekly, or even daily activities of employees, contractors, tenants, and stakeholders who carry out the corporate mission. This kind of adaptability and planning can help identify internal and external risks and avoid future operational and financial strain.

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The importance of flexibility can be seen in a recent study by NAR Commercial Membership, which showed 70 percent of surveyed companies reported they would be leasing or moving into offices with smaller square footage, with employees more likely to work from home. Regardless, certain office asset classes are seeing growth, while demand is also increasing in industries such as logistics and e-commerce, data centers, life sciences, and communities that provide a work-life-play environment. 

With the acceleration of remote work, business owners and leaders should be open to retrofitting and redesigning current large offices into communal spaces with a reduced footprint. While some tenants are looking for smaller, more customized spaces, others are looking to expand and can do so at relatively deflated prices. This means CRE professionals can lock in an “A tenant” in a property that those same tenants may have overlooked in the past, creating new opportunities for transactional growth. 

Listen to Your Stakeholders 

A plan is only as successful as those who are working toward the goals on a day-to-day basis. Buy-in and ownership are vital from internal employees and agents, and externally for shareholders, investors, tenants, and advisers. Employee satisfaction directly affects the firm’s bottom line and creates an environment of collaboration where members want to work together.

Pay Attention to Marketplace Trends

With individuals either moving to the suburbs or working remotely, historical CRE opportunities are changing in many large cities. Extremely low capital rates combined with companies embracing expansion will create new opportunities and continue to alter the industry through 2021 and beyond. For instance, changing an office’s current space configurations to meet tenant needs and comfort levels will be necessary. This may include tenants asking for more open space, additional collaborative spaces, upgraded air circulation, touchless technology, and secure entryways. Making these investments now will pay dividends down the road when renegotiating leases or attracting new investors or tenants as businesses return to work, expand operations, or seek a more attractive opportunity.

Investors will continue to look outside of traditional markets for reliable alternative assets with strong and monitored cash flows. Firms that are able to adapt to the ever-changing landscape will be the winners.

Despite the pandemic, environmental, social, and governance (ESG) investments have increased since COVID-19’s arrival. Instead of shying away, CRE firms should jump in headfirst and lead the effort. With a new presidential administration emphasizing concerns related to climate risk, investors and large tenants are starting to make ESG a requirement when looking for space. This could include items such as LEED certifications, sustainable open space, and carbon and energy reductions. Hardening of building systems to combat climate emergencies such as flooding and fire should be considered in current and new markets as well. Maximizing building energy use can also directly impact operating net income and increase asset values while attracting investors, but executive and adviser buy-in is paramount at all levels.

Monitor Cash Flow

Taking steps in business strategy cannot be implemented without continual knowledge of cash positions and reserves. Direct knowledge of cash position along with the use and sources of funds will elicit productive conversations with financial partners. Any cash flow modeling should incorporate cyclical trends, anticipated market tendencies and accelerations, changes in tenant behavior, upcoming leases, rent rolls, and known future capital and tenant improvement costs. 

Slowing rent collections in most industries and certain concessions made during the height of the pandemic have created a turbulent business environment. Improvements or maintenance may have been delayed with stay-at-home orders. CRE owners and investors should keep a close eye on small businesses that were helped with the American Rescue Plan and the Payroll Protection Program. These funds will soon dry up or may have already been used. However, PPP loans have allowed small businesses to stay afloat by helping them continue to make rent payments and retain staff during the pandemic. In turn, this has allowed CRE landlords and investors to accelerate growth, spend resources on improvements and upgrades, receive steady rent payments (even if reduced), and renegotiate leases from a fair position versus one of desperation. 

Additionally, borrowing rates should remain low in the immediate future to create a favorable environment for commercial borrowing and recovery. Perhaps the most important component of the cash flow model is understanding and evaluating the financing options available in the marketplace. Having proper financing available when not under financial strain will make navigating a bump in the road more manageable and allow a CRE firm to negotiate funding options from a position of strength — not one of anxiety.

With a volatile equity market and sky-high valuations, CRE is an attractive asset class for investors. They will continue to look outside of traditional markets for reliable alternative assets with strong monitored cash flows. Firms that are able to adapt to the ever-changing landscape will be the winners.

Set Yourself Up for Success

If the last two years have taught us anything, it’s that uncertainty can only be managed — not eliminated. CRE firms and investors can minimize ambiguity by sticking to the basics: develop and closely monitor a flexible and strategic plan; get investment from your team, tenants, and stakeholders at all levels; study the marketplace; and regularly monitor cash flow to make effective decisions. These initiatives will set up firms and companies for success in a rapidly changing environment while simultaneously setting those firms apart from the competition.

Travis T. Klein, CPA

Travis T. Klein, CPA, is principal in the tax department of Ellin & Tucker. Contact him at tklein@ellinandtucker.com.

Bryan C. Porter, CPA

Bryan C. Porter, CPA, is director in the audit and accounting department of Ellin & Tucker. Contact him at bporter@ellinandtucker.com.

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