Mitigating Risks and Identifying Opportunities in Your Portfolio with CRE Data
The commercial real estate (CRE) market is in a state of ongoing change and economic disruption as we near the end of the current cycle. Amidst the steady rise in interest and cap rates and ongoing supply chain issues, owners, borrowers, and investors are all impacted. But CRE data can help!
As discussed in the webinar, Leveraging Data to Mitigate Risks and Identify Opportunities in Your Portfolio, acquiring and refinancing new assets has become more expensive. Additionally, asset values are decreasing while operating expenses are trending upwards. In short, commercial real estate professionals face new challenges that they must now navigate to come out on top. But, CRE firms can prioritize and leverage data to weather the economical storm and ensure that investors remain happy. The right data provides on-demand insights into key metrics, like occupancy rates, NOI, and operating expenses. This information can be used to proactively predict and address risks and identify opportunities that enable exponential portfolio growth.
Read ahead to learn how to navigate market shifts and drive portfolio growth with data. Or, watch the on-demand webinar now!
The Background: CRE Market Shifts
Industry-wide changes including increasing interest rates, rising cap rates, and surging costs of labor and goods have created new challenges for CRE professionals. During the webinar, we dove into some of the major factors impacting the commercial real estate market today.
Cause #1: Increasing Interest Rates
Interest rates are on the rise, a trend that is anticipated to continue well into 2023. In June, July, and September 2022, the Federal Reserve, the nation’s central banking system, increased interest rates by 75 basis points to a target range of 2.25% to 2.5%. The Fed’s consistent rate fluctuations reflect the nation’s economic health. In turn, commercial real estate interest rates are on the rise.
Effect: More expensive to acquire or refi new assets
Inflation and interest rates are at an all-time high. As such, the cost to borrow money is increasing. High-interest rates can make it difficult for property owners to refinance their loans, leading to increased financial strain. Consequently, investors can’t afford to be as lenient on spending on highly appreciated assets as they may have been in the past. In short, as the cost of capital rises, it becomes more expensive to own and invest in real estate.
One common method to offset rising interest rates and pricing is to hedge inflation. Interest rate hedging is a means of protecting the assets’ values and reducing and controlling investors’ exposure to risks.
Note: Our sister brand, Thirty Capital Financial, can provide you with tools and custom solutions for interest rate risk management by using strategies that consider your risk tolerance and the current market.
Cause #2: Rising Cap Rates
Rising cap rates is yet another factor in today’s shifting commercial real estate market. Properties with higher cap rates tend to have more inherent risk, while those with lower cap rates tend to carry lower risks. Commercial real estate owners and investors are adjusting to a higher-risk market that is causing asset values to decline.
Effect: Lower asset values
Cap rates generally have an inverse relationship to the property value. The higher the cap rate, the lower the purchase price and vice versa. Property prices are inversely related to cap rates because higher risk properties tend to have lower prices and vice versa.
Cause #3: Surging Labor and Goods Costs
In most markets, construction activity slowed due to labor and material shortages related to the pandemic. As labor and goods become more difficult to find, the commercial real estate market has felt the effects on both new and renovation projects. According to JLL Research, in May 2022, labor and material costs were up more than 13.6%. These increases have amplified pressure on rents, creating challenges for development deals (particularly those with long lead times).
Effect: Increasing operating expenses
Higher expense ratios is a major effect of the increasing costs of labor and goods. As the costs of labor and goods increase, the costs of maintaining the property and paying staff do too. Thus, operating expenses, the costs associated with operating and maintaining a commercial property, also begin to rise.
Mitigating Risks with CRE Data
Data is key in proactively identifying and reducing risks caused by rising interest and cap rates, surging costs of labor and goods, and other factors driving change in the CRE market. Timely, actionable data can be used to monitor trends in your portfolio for stronger decision-making. For example, when you consistently track key metrics, you can anticipate and proactively respond to changes in the portfolio.
During the webinar, we discussed three practical scenarios for using data to mitigate risks:
Scenario One: Broadening the Leasing Funnel
Leasing data, which is trackable in Lobby CRE’s configurable dashboards, can be used to quantify occupancies and vacancies so that you understand the property’s performance. For example, vacancy data can help you determine how 1-bedroom apartments are trending so that you can proactively begin sourcing tenants to fill vacant units.
Scenario Two: Tracking Delinquencies
Delinquency data, which is trackable in Lobby CRE’s configurable dashboards, helps you identify rent payment trends so that you can quickly spot and respond to changes. Additionally, data can be used to determine which cities have the most delinquencies so that you can make calculated decisions about where to build your next property. In short, data gives you the tools to spot and avoid risks so that you can play offense rather than defense in each scenario.
Scenario Three: Monitoring Expense Ratio
Expense ratio data, also trackable in Lobby CRE, can be used to examine property performance, identify opportunities to improve operations, and compare performance across multiple properties. For example, the expense ratio can help you monitor monthly utility costs and quickly identify changes that could impact your expenses.
Navigating the Changing CRE Market
Now more than ever, commercial real estate professionals must consider how to navigate the unpredictable market. Technology is shifting to the forefront of the conversation as they seek to find new opportunities – and with good reason.
Asset management software, like Lobby CRE, automates manual tasks (like data entry) so that you can spend more time analyzing current deals to spot inefficiencies. On the other hand, automation frees up your time so that you can explore new opportunities . With automated data collection, analysis, reporting, and more, you can use real-time insights to scale your CRE firm. More time to focus on deals means more opportunities to manage and optimize cashflow for faster returns for the Sponsor and Investors.
Watch the webinar, Leveraging Data to Mitigate Risks and Identify Opportunities in Your Portfolio, to hear the full discussion.
