In an earlier post, we covered some of the Trump administration’s economic policy impacts on commercial real estate (CRE). Amidst trade tariffs, Fed rate hikes, and Qualified Opportunity Zones, there’s ample reason to be both excited and concerned about what 2019 has in store for investors.
While weathering government shutdowns, watching mortgage rates rise and fall, and reading the seemingly endless list of retailers declaring bankruptcy and shopping centers closing can bring a degree of uncertainty to the market, the good news is that there are ways to maintain relevance and resilience during a period of ambiguity. Read on to find out how.
Be Flexible
Coconut trees survive hurricanes by bending with the wind. Trees that are too rigid, fighting the forces, are often uprooted and destroyed. Similarly, when the market seems to be huffing and puffing, flexibility is key.
As commercial real estate technology advances at an increasing pace, flexibility remains one of the top qualities of investors looking to withstand market uncertainty. Blockchain, artificial intelligence, autonomous vehicles, and the Internet of Things all promise to bring change and opportunity to CRE; it’s important to balance prudence with not being left behind.
While technology advances, so do business owner practices. Younger potential tenants are likely to be seeking commercial real estate using digital methods; it’s imperative to “get with the times” and make sure someone on your team is working to capture this emerging demographic.
Business market uncertainty also means business owners will try to mitigate risk any way possible. Often, this means seeking short-term leases rather than long-term ones. As a CRE investor, it’s time to open the door to short-term tenants. While it may not look good on paper, increasing your net operating income to outweigh the risk of vacant space is necessary to stay relevant—you can always revisit long-term lease options again once a short-term lease ends, depending on the market.
Smart property owners may even take this a step further, filling empty spaces by offering them for free to co-working companies and incubators. Putting people in a building increases its draw for restaurant, coffee shop, and other business owners who can cater to those who are using the space for work.
While giving away space sounds counter-intuitive, filling even half a building with paying tenants is better than leaving it empty. Whether a similar option is right for you will, of course, depend on your level of flexibility.
Use Your Network
As with most things in life and business, it’s your circle that best supports you in uncertain times.
It should go without saying that maintaining your network even when the industry is growing is important; fail to manage your relationships, and you’ll feel the repercussions when the cycle moves into a downturn and the need for capital is high.
If you’ve maintained your network this cycle, you’ll know that many banks have altered their primary business line. Others have merged or even shut down completely. As you work to predict what the end of the cycle means for your investments, knowing where banks in your network stand is of utmost importance. For example, a bank that has shifted focus away from commercial real estate after a merger may no longer be the ideal choice for an investor.
Keep abreast with the movements of banks, firms, and other institutions in your network. With a keen eye set on seeking out ideal partnerships for the shifting landscape, you’ll be sure to find someone with a creative solution to your biggest challenges.
Creative approaches to problem solving have always been the fulcrum of good investment decisions, and they’re strengthened when solutions are designed through collaborative effort. Partnerships with equity providers and asset managers that mitigate and diversify risks are most easily found within a well-maintained network of mutually benefiting parties.
Diversify
Diversifying has always been a requirement for durability in investing, and commercial real estate is no exception. In our current situation, we can draw on history to inform decisions about the best way to stay relevant in uncertain times.
Every downturn affects each property sector market differently. From the tech bust of 2001 to the housing crisis of 2008, various investors have always felt different effects. It is only by spreading risk across many sectors that it can be minimized for riding out rocky cycle periods.
While retailers and shopping centers are taking a hit at the moment, demand from e-commerce companies in need of warehouse space is on the rise. Warehouse vacancy rates, in fact, were at a record low in 2018—something few investors likely predicted, but many benefited from because of portfolio diversity.
As you diversify, remember to mitigate risk with careful consideration. Blind diversification can be just as dangerous as no diversification at all, especially if you find yourself tied into an investment everyone else knew to avoid. Ask questions and do your research, always considering your network and the resources and people in it who have something to offer that can strengthen the investment.
Maintain Relevance and Resilience with Help from PRC
An old dog may not be able to learn new tricks, but fortunately, these are old tricks that merely need small calibrations to meet the newest set of market demands. By maintaining networks and a diverse portfolio, and staying flexible, you too can weather any commercial real estate storm. Contact a Pioneer Realty Capital commercial real estate financial expert, and keep afloat during uncertain markets.
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