During these unpredictable times, there are things you should be considering to avoid a “race to the bottom”
November 11, 2020 Dan Bartell
With uncertainty surrounding the Commercial Real Estate market (due to the Covid pandemic, the upcoming election, market volatility, tax considerations, etc.), many property owners are faced with the complicated choice of whether to hold or sell their assets. While there are myriad factors that come into play during the decision-making process, some are more pertinent than others. If you’re a property owner who is sorting-out these matters, here are the primary things to consider.
This is the time to do a deep-dive into market analytics, both in the Denver/Boulder metro area and in its sub and micro markets, as well as your tenants’ industries economic risks, all of which affect your property value. Taking due time to evaluate both the direction and stability of the historical market for your product type, and a realistic market forecast, could afford you a clear lens to view your decisions.
It will also help you to evaluate potential risk and reward, and hidden opportunities as they relate to your personal wealth management and business’s short, medium and long-range facility needs. This type of analysis can best be handled for you by an unbiased real estate wealth manager with tools and experience necessary in evaluating overall market conditions, competitive loan terms, and your property’s deferred maintenance and capital needs.
Business Needs versus Personal Wealth Management
The delicate balancing of your real estate holdings with the needs of your business and those of your overall estate planning, sometimes involve opposing objectives. Over time, risk tolerance and income needs are only infrequently evaluated as part of personal wealth management and business plans. If a real estate holding exceeds your level of risk tolerance or isn’t fulfilling its original objectives, might it be time to sell, buy more, or adjust your strategy?
Reducing your partnership share and diversifying your portfolio by rebalancing are ways to adjust to new conditions and needs. Try to strike a balance between what percentage of your personal wealth portfolio should be dedicated to real estate and prioritize based on the risk and reward and the way your assets fulfill your objectives.
Now is the time to take an honest and comprehensive look at your property’s infrastructure to assess current expenses as they relate to the timing and risk of potentially more severe future
repairs and replacements. You might benefit from economies of scale by sharing new CapEx with others or across your portfolio. The HVAC, roof, parking lot, electrical and structural systems will include most of the consequential capital elements of the property. Work with a real estate professional and their team to determine the remaining usable life of these critical components, and the financial risks associated with delay, and benefits of improvements, in whole or in part. The longer you delay this assessment, the greater the potential for unexpected budget surprises. More important, these same decisions may greatly increase your return on investment or lack thereof, when it comes to operations, sale or refinancing.
Look for Opportunities to Add Value
You may be able to identify opportunities to add value to your property by taking a 360-degree view of your property. For example, unused storage or yard space on an industrial property could be converted into a build-to-suit or land sale opportunity. Adding square footage by maximizing zoning entitlements may create a new source of income and value. Simply up-zoning to a more valuable product type might be rewarding. I can show you how. Doing so will increase your sale price when it’s time for disposition. It might also afford you partnering possibilities you previously didn’t have. Perhaps finding ways to enhance the design of your property to become more resistant to the “COVID 19” effect and future pandemics or logistical changes that may arise, will be productive. Time spent on this now could reduce risk and yield more appeal and value going forward.
During challenging times in the real estate market, it’s been said that all of a sudden there’s a “Race to the Bottom,” where owners, too little, too late, compete to differentiate their property, only failing to separate themselves from the pack. Rarely are you adequately prepared.
Now is the time for you to preclude that risk, armed with knowledge and a strategy to effectively improve your properties and keep them stabilized, making them as profitable as possible; all the while abiding by your wealth management goals.
Dan Bartell is the President of Bartell and Company Real Estate and Bartell and Company Real Estate Wealth Management, a 35 year old firm that focuses on thoughtful approaches to creating and maintaining value, and whether a property was productive because of its owner or in spite of them. He can be reached at 303-753-9100 or firstname.lastname@example.org.