How to Prepare Your Business for an Uncertain Real Estate Market

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If there’s one common theme that resonates across the real estate market from property owners and investors to developers and asset managers, it’s uncertainty.

Constant changes in the market, such as interest rates, inflation and rising operational costs, to name just a few, have the potential to negatively affect real estate businesses. With no crystal ball to illuminate a sure path, all levels of ownership are seeing changes to their investments and bottom lines.

This uncertainty applies to not only the owners but also their tenants. Changing work environments in the wake of the pandemic, an increase in automation and the rise of AI are just a few factors contributing to income shortfalls that result in late rent and lease payments.

Thankfully, uncertainty in the real estate market doesn’t have to spell misfortune.

Identifying the best approach for your business

The way in which companies are adapting to stay in good financial standing looks different for each business owner, but one thing is clear: Financial decisions made now have the potential to impact your business’s long-term financial state.

A few initial steps to take to manage risk while navigating the ever-changing state of the real estate industry include:

• Ensuring you have a comprehensive understanding of your current financial position with respect to real estate holdings, loan maturities and current interest rates.
• Communicating thoroughly, regularly and clearly with a banker who has experience working with real estate owners/investors and understands the full spectrum of market factors and solutions that can boost your success.
• Evaluating the financial position and health of any tenants you may have and assessing your revenue streams.
• Transparency with your banker regarding your short- and long-term goals and remaining open to new products and services your bank offers that may help you achieve those goals.

While many real estate companies focus on maintaining a strong cash position, owners and investors alike are concerned with rising costs.

To avoid cash flow impact in the short term, real estate companies may pass rising costs along to customers by raising rents. Despite high competition to acquire tenants, potential renters often must accept those rent increases, as many real estate companies will be in the same position, weathering market-wide expense fluctuations.

Build a customized strategic plan

For any business, financial strategies should consider efficiency and risk alongside growth. Whether you’re an investor, owner or asset manager, securing the best loan possible for acquisition, construction or refinancing is more important than ever.

For some real estate businesses, taking advantage of tax credit programs or nontraditional loans can prove essential in successfully positioning your company for future growth — even during market instability. Consider exploring specialized financing options, such as historic tax credits, bridge loans or the federal New Markets Tax Credit program.

To take an even more well-prepared approach to positioning for the future, include the following measures as you continue to strengthen your financial position:

1. Consider all the ways commercial real estate may change moving forward. Explore the opportunities and challenges that the different scenarios present.
2. Assess how you’re managing cash. Determine how priorities will shift on your list of future capital expenditures and tenant improvement costs.
3. Identify the efficiency levers you have based on the underlying performance of properties. Keep in mind that you are striving for a balance between increased rental income and increased expenses.
4. Develop a plan for any short-term liquidity management issues. Ask yourself what creative funding options you might explore with your bank to maintain liquidity in the short and long term. Most banks today require deposits to provide financing.
5. Diligently research technology and outsourcing solutions that drive top- and bottom-line growth. Evaluate the advantages in your business process for automating operations, payments and processing.

As we continue to traverse an increasingly unpredictable path in the real estate sector, it is more essential than ever to have a nimble financial strategy that aligns with your business goals, and to have good communication with your banker.

Source: RE Journals