Striking the Balance: Navigating Short-term Performance and Long-term Viability in CRE 

In commercial real estate (CRE), achieving an equilibrium between short-term performance and long-term sustainability is key. In our recent webinar, Striking the Balance​: Navigating Short-term Performance ​and Long-term Viability in CRE, experts, Mark Runde, SVP of Asset Management, and Jeff Lee, SVP of Debt Management, discussed how to achieve this balance by focusing on present-day asset performance and operations, all while maintaining a forward-thinking approach on current debt management practices. This approach will ensure that future market dynamics do not undo any established gains.

Watch the webinar to dive into their full conversation. Or, read ahead for an overview of the strategic insights, challenges, and actionable steps discussed during the webinar.

Challenges & Headwinds in Asset Performance

Navigating the current market of CRE is not without its challenges. However, with each obstacle that CRE professionals encounter in asset performance, there is a strategic solution for long-term viability.

Declining Rent Growth

One of the most common issues faced by CRE professionals is declining rent growth. In a challenging market, finding ways to maintain and grow top-line revenue becomes essential. This requires innovative strategies to attract and retain tenants while ensuring that rental rates remain competitive. By leveraging market insights and implementing creative leasing initiatives, CRE professionals can mitigate the impact of declining rent growth and sustain revenue streams over the long term.

Increased Expenses

Another significant challenge stems from the rise in both controllable and non-controllable expenses. From maintenance and utilities to taxes and insurance, costs continue to escalate, exacerbated by fluctuating interest rates. CRE professionals must adopt a proactive approach to expense management, conducting thorough analyses to identify areas of inefficiency and implementing cost-saving measures where possible. Moreover, exploring alternative financing options and renegotiating contracts can help lower the consequences of rising expenses, safeguarding NOI and cash flow in the face of economic headwinds.

Operational Inefficiency

Operational inefficiency poses another hurdle to asset performance. Ineffective management practices not only lead to increased costs but also contribute to reduced tenant satisfaction. Addressing operational inefficiencies requires a multifaceted approach, encompassing enhanced communication channels, streamlined processes, and proactive problem-solving. Through accountability and continuous improvement, CRE professionals can optimize operational efficiency, thereby enhancing the overall tenant experience and driving sustainable value creation.

Learn More: 3 Operational Factors That Can Impact Profitability

Rising Debt Costs

The final challenge is the rising costs associated with debt. As interest rates fluctuate and financing terms evolve, CRE professionals must stay vigilant to avoid being blindsided by escalating debt obligations. This necessitates a thorough understanding of current loan terms, as well as proactive monitoring of market trends and interest rate forecasts. Through exploring refinancing opportunities, optimizing debt structures, and diversifying financing sources, CRE professionals can mitigate the impact of rising debt costs and maintain financial resilience in a dynamic market environment.

Strategies for Success

CRE professionals must adopt a proactive and forward-thinking approach to asset and debt management. Understanding market dynamics comprehensively is the first step towards formulating effective strategies that capitalize on emerging opportunities and mitigate potential threats. Maintaining rigorous leasing standards and conducting meticulous expense analyses are essential to optimizing revenue streams and controlling costs. Similarly, strategic renegotiation of third-party contracts and fostering open communication channels with on-site management enable CRE professionals to address operational inefficiencies and enhance tenant satisfaction. Taking these proactive measures allows CRE professionals to set themselves up for success.

Addressing Declining Rent Growth

Declining rent growth poses a significant challenge for CRE professionals, requiring proactive measures to maintain revenue streams. Consider the following:

• Understand comps and your property’s position in the market: Conduct thorough market research to identify comparable properties and gauge your asset’s competitive positioning. This insight enables informed decision-making regarding rental rates and leasing strategies.
• Balance rent and occupancy: Strive to strike a balance between maximizing rental income and maintaining high occupancy rates. Flexible leasing terms and incentives can help attract and retain tenants while optimizing revenue.
• Maintain leasing standards: Uphold rigorous leasing standards to attract quality tenants and minimize vacancies (e.g. thorough tenant screening processes and proactive lease management).
• Search for additional sources of revenue: Explore alternative revenue streams, such as ancillary services or amenities, to supplement rental income and enhance overall property performance.

Mitigating Increased Expenses

Rising expenses present another challenge for CRE professionals, necessitating diligent cost management practices. To mitigate the impact of increased expenses:

• Analyze expenses line by line: Conduct a comprehensive review of operating expenses to identify inefficiencies and cost-saving opportunities.
• Understand your marketing sources and their effectiveness: Aim to maximize ROI by evaluating and allocating resources appropriately across marketing channels. 
• Rebid third-party contracts: Regularly reassess vendor contracts and negotiate favorable terms to minimize costs. Soliciting competitive bids from multiple vendors can drive cost savings without compromising service quality.
• Taxes/Insurance: Seek expert guidance from consultants specializing in tax abatements and insurance options. Leveraging their expertise can result in significant savings and ensure compliance with regulatory requirements.

Improving Operational Efficiency

Operational inefficiencies can undermine property performance and tenant satisfaction, highlighting the importance of proactive management practices. To enhance operational efficiency:

• Communicate with on-site management frequently: Foster open communication channels with on-site management to stay abreast of market trends and property-specific challenges. Regular dialogue enables timely problem-solving and proactive decision-making.
• Be proactive: Anticipate and address potential issues proactively to prevent escalation. Implement preventive maintenance programs and conduct regular property to increase tenant satisfaction.

By implementing these strategic initiatives, CRE professionals can navigate challenges effectively and position themselves for sustained success in the competitive CRE landscape.

Don’t Forget About Debt

An informed understanding of recent debt trends empowers CRE professionals to make financial decisions that drive sustainable growth and mitigate risks. Understanding key factors such as loan terms, interest rates, and credit spreads, CRE professionals can optimize their debt management strategies and capitalize on emerging opportunities in the market. Moreover, leveraging data from the implied forward curve provides insights into future market trends, enabling CRE professionals to anticipate market fluctuations and make timely decisions that maximize returns and minimize risks.

Suggested: Understanding Forward Rates: Mastering Forecasting and Identifying the Optimal Time to Transact 

Navigating the Balancing Act

The balancing act between short-term imperatives and long-term objectives requires CRE professionals to make strategic decisions that align with their overarching goals: maximizing net operating income (NOI), bolstering cashflow, enhancing property valuation, and accessing more favorable financing options. Additionally, ensuring compliance with loan covenants, particularly debt service coverage ratio (DSCR), is a cornerstone of financial stability and growth. 

The long-term goals of portfolio management go beyond financial metrics; they are the pillars upon which sustainable growth and prosperity in CRE are built. By focusing on net operating income NOI and maximizing cashflow, CRE professionals lay a solid foundation for achieving higher property valuations and gaining access to more favorable financing options. Understanding the DSCR helps maintain financial stability, mitigate risks, and enhance the credibility of CRE portfolios in the eyes of lenders and investors.

So, while short-term gains may seem enticing, they must be evaluated in the context of their long-term impact on asset performance and sustainability. For instance, increasing rental rates to boost short-term revenue may lead to higher vacancy rates and tenant turnover in the long run. Similarly, implementing expense reduction measures without considering their impact on customer service levels may compromise the long-term quality of the asset and erode its competitive advantage. Determining the timing and scope of capital expenditures is equally crucial, as it requires achieving a balance through addressing immediate needs while also investing in projects that create enduring value and competitive differentiation.

Watch the On-Demand Webinar

In today’s dynamic market environment, proactivity and knowledge empowerment are the keys to success for CRE professionals. By anticipating market rate movements, exploring diverse financing options, and initiating strategic planning initiatives early on, CRE professionals can position themselves for sustained success and growth. With a forward-thinking approach and maintaining a present-day focus, CRE professionals can navigate the CRE landscape with balance, confidence, and agility.

Don’t miss out on the wealth of insights and strategies shared in our webinar. Access the on-demand webinar and transform your CRE playbook and equip yourself with the tools needed to thrive in the current market!