Guernsey: Asset management: The silver bullet in a time of uncertainty
Benjamin Franklin was a man of many talents. He was the diversified inventor of bifocals, flexible catheters and swim fins, and in his spare time signed the Declaration of Independence. Amazingly, in his infinite wisdom, his list of accomplishments may also include heeding the perfect advice about the true value of asset management in real estate; “By failing to plan, you are preparing to fail.” (Benjamin Franklin — 1790)
A strong economy is good for many things in commercial real estate, including sweeping problems arising from poor planning neatly under the rug. When the music slows or stops, we are all forced to deal with everything that was nicely tucked under that rug. Commercial real estate owners who have been diligent in their planning will be rewarded. For owners who have been less diligent…. what they find under their rug may significantly impact their investment. In other words, their failure to plan could be their preparation to fail.
Seemingly, no two economists agree upon what 2023 has in store for us. There is no crystal ball, however, we can likely all agree that we are knee deep in uncertain times. As investors seek ways to mitigate risk, true asset management may be the silver bullet investors are searching for.
Most investors are familiar with traditional brokerage services: advisers who manage buying, selling and leasing transactions in real estate. Most investors are also familiar with property management: the day-to-day oversight of property operations (tenant issues, maintenance, rent collections, bill payments and associated accounting). The best brokers and property managers are proactive and forward thinking in their activities.
However, asset management takes a proactive approach to the next level by providing the comprehensive planning that Benjamin Franklin so valued. By definition, asset management provides a strategic, proactive, and holistic approach to maximizing the performance and value creation associated with an investment. As investors in real estate, we are staring down the barrel of a number of risk factors, risks for which prudent real estate owners can develop a strategy, or “hedge” for:
A few asset management hedging strategies:
Rising interest rates — With rising interest rates, investors should be proactively looking at their real estate portfolio and paying particular attention to when their loan rates either adjust or mature. Depending on the timeline of these loan dates, this item could be mission critical to the asset’s cash flow. While a refinance in today’s market is likely unattractive compared to the rates we’ve seen during the past 24 months, refinancing now could provide a hedge should rates continue to climb moderately or substantially if the Fed tries to head off inflation.
Rising costs — Strategically plan for capital improvements on your property. During a period of incredibly high construction costs, property owners should weigh whether the allocation of maintenance dollars heads off larger repairs long-term, or if they’re likely to be required to replace systems or improvements in the near future at an increased cost.
Tenant rollover — Don’t be caught with unnecessary vacancy. Look ahead at upcoming lease expirations for your property. With proper planning, you can reduce the vacancy period between tenants. Start renewal conversations with tenants long before they are required to provide notice and consider flexible and attractive renewal terms. During this period of high inflation, owners may benefit from considering shorter term leases. This is particularly true in multi-tenant buildings and can help alleviate future vacancy pains with staggered lease expirations across different months and years.
History repeats itself, and the wisdom offered by Benjamin Franklin rings more true today than ever. With prudent asset management, investors can navigate whatever 2023 and beyond has in-store for us and come out of this economic season relatively unscathed.
Josh Guernsey is managing broker at Waypoint Real Estate LLC, a real estate company located in Fort Collins providing commercial real estate brokerage, investment and property management services.