1. Diversify Your Portfolio
An age-old adage, this advice stems from the idea that holding a variety of assets helps an investor mitigate the risks and cycles associated with a particular market or sector. In a well-balanced portfolio, lower risk (lower return) assets may offset higher risk investments that have the potential to yield greater returns.
Diversifying within commercial real estate itself means investing in a variety of property types and markets. Wise investors also consider how the particular property has historically performed, whether the market has solid fundamentals, and so on. (More on this next.)
2. Focus on Quality
Characterized by strong fundamentals and a history of performance, high quality properties tend to provide more stable income streams because they attract and retain quality tenants.
Location is another factor affecting overall investment quality. This includes strong market area conditions, like population growth and comparatively low unemployment rates. Other factors include proximity to transportation hubs or other amenities that complement the property use.
The property’s age and condition also play a role, with newer buildings typically exhibiting higher design intelligence such as LEED or ENERGY STAR certifications. These not only correspond to lowered costs of heating and cooling, but also attract more eco-conscious tenants.
Buildings do not always have to be newer, though; older properties that are well maintained or renovated will also help investors minimize costly maintenance or repairs that erode return on investment (ROI).
Amenities are another key element impacting quality and desirability of your commercial investment, since they correspond to higher rates of performance.
Income stability is another sign of investment quality that is strongly tied to quality tenants with good credit ratings, well-structured leases, and professional property management that prioritizes prompt and effective maintenance and repairs, while maintaining tenant satisfaction and good occupancy rates.
3. Extend Loan Terms
When possible, it may be wise to negotiate a longer loan term with your lender under a commercial loan modification.
Because many commercial real estate loans have a shorter duration—from five years (or less) up to 20 years—and often have an amortization period longer than the life of the loan, interest payments are front-loaded and most of the principal is due in one larger, balloon payment at the end of the loan. Investors with these loans may have a looming maturation date and uncertainty over whether they have the capital to pay it off. If this is the case, be proactive—reach out to the lender to see about the options for renewal, refinancing, or extending the term through a modification.
Extended loan terms mean more infrequent refinancing, which could be a benefit if you would have had to refinance in a high interest rate environment. Extending a term for a property you intend to hold long-term can have the added benefit of preserving your ownership of the property while avoiding forced sale or default in an unfavorable market.
There are some potential pitfalls to consider with this option, however:
- While extending the loan term may result in lower monthly payments, it will also typically lead to paying more in interest overall, increasing the total cost of the servicing.
- Extension may lead to a higher loan-to-value (LTV) ratio which could adversely affect future loan terms or refinancing efforts.
- For properties that are underperforming, a loan extension could lock in terms that are less favorable than they would if the performance were optimized.
- If interest rates are expected to decrease in the near term, a loan extension may not prove favorable in the long run.
If considering an extension, be sure to weigh the associated benefits and risks and ensure that the terms align well with your goals (and with your timeline for the sale of the property, as applicable).
4. Reevaluate Rental Rates
In a shifting economic landscape, it is vital to assess current trends and ensure your property’s rental rates are competitive in the market. Market dynamics and tenant expectations can change swiftly, and taking the time to evaluate your rental rates and lease structures can help attract and retain tenants and avoid costly vacancies.
When vacancies are increasing in a market, it is often easier and more cost effective to retain existing tenants than to seek new ones, so offering existing tenants reasonable lease terms will pay off in the form of low turnover, bolstering occupancy rates and income stability.
Stable rental income is essential to cover operating expenses and investor returns, so a keen assessment of rental rates and lease terms can reduce the risk of gaps in income due to vacancies.
Periodic assessment of rental rates and lease terms also helps investors check the pulse of the market and demand, enabling them to see trends and pivot as needed, building investment resilience.
Across the nation, Valbridge Property Advisors offers market rent analyses that provide an unbiased assessment of current market conditions.
5. Improve Property Efficiency
While it can be difficult to prioritize during a credit crunch, improving a property’s operating efficiency is a strategic move that increases both profitability and resilience. If these modifications are feasible within your investment plan, they could provide a competitive advantage by positioning your investment for superior performance when the market returns to a growth phase.
Property owners have several options to boost efficiency, some of which may be eligible for tax credit incentives. These actions include energy efficiency upgrades, securing green building certifications, waste reduction, water conservation measures, technology integration, and proactive maintenance and repairs. All of these can reduce utility costs, while attracting environmentally conscious tenants.
Strategic capital improvements can increase property value and curb appeal, helping to attract and retain tenants, while flexible space design can position your property to meet tenants’ changing needs. Both improve efficiency by strengthening tenant satisfaction and offering space that can be customized without expensive tenant improvements.
6. Increase Cash Reserves
Optimizing property efficiency also helps build cash reserves—a solid strategy amid economic uncertainty, since it helps property owners cover unexpected expenses or declines in rental income without having to secure alternative financing in market dominated by higher interest rates.
As mentioned earlier, extending loan terms, reevaluating rental rates (and loan terms) and improving property efficiency can all bolster reserves and help fight off costly vacancies. Aside from these options to increase cash reserves, commercial real estate investors may also try these:
- Offer incentives like rental rate concessions or allowances for tenant improvements to attract tenants and help lease up vacant space.
- Pass-through expenses like common area maintenance (CAM) charges if the lease agreements and market regulations allow for it.
- Consider alternative income streams like leasing land or rooftop space to cellular providers or offering advertising options via billboards or tenant signage agreements.
- Create a cash flow budget to get a full financial picture and analyze where cash can be conserved and stick with a plan to build reserves from a portion of each month’s rental income.
- Consult with a tax professional to see what tax credits and deductions may be available to reduce your tax liability and increase your after-tax cash flow.
- Explore property tax appeal as a means to lower your tax liability. (Your local Valbridge Property Advisors office can help you determine if an appeal would be feasible for your property.)
7. Explore Alternative Financing
During a credit crunch, unconventional financing may be an avenue through which to secure investment funding or increase cash reserves. These options include hard money loans, private equity partnerships, crowdfunding, peer-to-peer (P2P) lending, real estate investment trusts (REITs), seller/owner financing, syndication deals, commercial mortgage-backed securities, mezzanine financing, sale-leaseback transactions, and bridge loans.
With so many options to consider, and each with their own benefits and drawbacks, it is wise to seek expert counsel, considering each asset and financing option within the framework of your broader investment strategy.
8. Stress Test Investments
Evaluating how your properties are likely to perform under various economic conditions is key to choosing and retaining quality assets. By analyzing your investments and forecasting their performance under adverse or even extreme scenarios, investors reach an informed position from which to act.
Identify stress scenarios applicable to each property and your portfolio as a whole and assess the impact of these conditions on cash flow, debt service, property valuation, and liquidity.
Analysis of your investment’s sensitivity, diversification, and even your insurance coverage can help ensure you are positioned for success under adverse conditions. As part of this, be sure to review your financing options and current risk mitigation strategies, pivoting as needed.
It’s wise to review and update your stress tests regularly to account for changes in the market and in your investment objectives.
9. Consult with Experts to Stay Informed and Adapt
A theme throughout this post, staying informed is key to building resilience in your investments and adapting to changes as they arise. While economic uncertainty involves variables outside investors’ control (like market fluctuations or policy enacted by the Federal Reserve), savvy investors ensure they are doing what they can to safeguard their portfolios and prepare for scenarios that may come.
Proactively evaluate your investments and consult with professionals as needed to assess your strategy and provide insight on how to adapt in a changing economic environment.
From property managers to tax consultants or real estate appraisers, professionals provide commercial real estate investors with the insights they need to make informed and timely decisions based on their unique circumstances.
Whether you need an unbiased assessment of your current investment properties or of one you wish to purchase, Valbridge Property Advisors’ appraisers can help. Through appraisal reports, market rent analyses, feasibility studies, and even property tax appeal, our real estate valuation professionals in your market will inform you of the latest market conditions and the factors that affect your investment property or portfolio.
These appraisal reports provide regional and neighborhood demand drivers (such as demographic and unemployment information) that—when combined with market area statistics relevant to the property type and an assessment of the age, quality, condition, location, access, zoning, and other characteristics of the investment—provides a solid and unbiased assessment of its strengths, weaknesses, threats, and opportunities.
For an in-depth valuation of your investments, reach out to your local Valbridge Property Advisors office today.
While Valbridge Property Advisors offers a suite of customized insights tailored to your properties, you can even find national CRE insights on our website—equipping you to build resilience in your investments.
Note: This is not intended as investment advice or a recommendation to buy, sell, or hold any financial assets. Always consult with a qualified financial advisor before making any investment decisions.