The Future of Commercial Real Estate: Creating Opportunity Out of Adversity

This article originally appeared in CIRE Magazine. 

Future planning and strategy in the commercial real estate (CRE) industry is a challenging and time-consuming process in stable years, let alone during a global pandemic. COVID-19 has influenced virtually every part of our lives, including how people see real estate footprints. With the second half of 2021 well underway, 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, and firms should remain nimble when planning for the future. With that in mind, here are the key considerations when positioning for success in the current marketplace.

Create a Flexible Business Strategy

Having a sound business strategy is critical to any company’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 will remain flexible and weave the core mission into the monthly, weekly, or even daily activities of the 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.

Virtually every sector of CRE has changed in the past 18 months, which is why adaptability is key to success. For example, in a recent study by NAR Commercial Members, 70% of surveyed companies reported they would be leasing or moving into offices with smaller square footage due to employees working from home. Despite this revelation, certain office asset classes are seeing growth and demand is actively increasing in industries such as logistics and e-commerce, data centers, life sciences, and also 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 their size 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 and Get Your Team on Board

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

Pay Attention to Marketplace Trends

With individuals either moving to the suburbs or working remote, some historical CRE opportunities in large cities are changing. Extremely low capital borrow rates combined with companies embracing expansion, will create new opportunities and continue to alter the industry in 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 more businesses return to work, expand operations, or seek a more attractive opportunity.

Despite the pandemic, environmental, social, and governance (ESG) investments have increased over the past 12 months. Instead of shying away, CRE firms should jump in headfirst and lead the effort. With a new administration and climate-change plans at the forefront, 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. Maximizing building energy use can also directly impact operating net income and increase asset values while attracting investors, but executive and advisor buy-in is paramount at all levels of the process.

Monitor Cash Flow

Taking steps in business strategy can’t be implemented without continual knowledge of cash positions and reserves. Direct knowledge of cash position along with the use and sources of cash will illicit 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. Many 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 (PPP). These funds will soon dry up or may have already been used. However, PPP has 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.

Borrowing rates should remain low in the immediate future, creating 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 anxiety.

With a volatile equity market and sky-high valuations, CRE is an attractive asset class for investors, especially in certain segments and industries. Investors will continue to look outside of traditional markets for reliable alternative assets with strong and monitored cash flow. Firms that are organized for future success and 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 is 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 great firms and companies for success in a rapidly changing environment while simultaneously setting those firms apart from the competition.