Coming off a long streak of rising valuations, cap rate compression, and historically low interest rates, commercial real estate stakeholders face a potentially deal-breaking disparity between the prices sellers are willing to accept and what buyers are willing to pay. 

In this article, we’ll look at what the bid-ask gap means, how current market conditions are widening it, and conventional and data-backed strategies to narrow the spread.

1. Bid-ask gap defined and market conditions

Before we get further into the discussion, let’s define the concept. The Bid-Ask Gap is the difference between what sellers and buyers will agree to as the sales price of the asset. In other words, the ‘ask’ is the lowest price the seller is willing to accept, and the ‘bid’ is the highest the buyer is willing to pay.

In economic terms, the ask is an indicator of supply, and the bid indicates demand. The average bid-ask spread in the market is also considered a measure of market liquidity. When there’s strong liquidity in the market, demand will increase as buyers have plenty of debt and equity to leverage for acquisitions. Asset classes with solid demand and low cap rates will typically have tighter spreads.

Inversely, the bid-ask gap increases when demand is low and the capital markets are bearish. This is particularly true going into 2023, as the market cools from its unprecedented run-up and sellers continue to reach for high prices. Meanwhile, buyers are wary of falling valuations and increasing financing costs.

While the FOMC cut rates during the pandemic to keep the economy going, investors were scooping up supply at exaggerated values to secure deals amid soaring competition. Those buyers were armed with ample liquidity and confidence in rising values and lease rates.

Many of those buyers and investors, including those who refinanced to higher LTVs, are now over-leveraged (negative leverage) and aren’t in a position to sell at the prevailing bid prices, thus widening the gap as demand subsides alongside buyer liquidity and confidence.

2. Closing the bid-ask gap — conventional strategies

What can parties on both sides of the transaction do to close the bid-ask gap?

The ideal approaches are those implemented in advance of marketing and negotiations.

For sellers, proactive strategies include making improvements, adding sought-after amenities, optimizing expenses, and maximizing occupancy. The intent of these measures is to reach peak NOI, reduce perceived risk, and stoke demand.

These initiatives may require additional capital, which could be too costly and/or unavailable under current conditions. Still, these repositioning strategies are worthwhile for owners with liquidity and will draw the highest possible bids.

Once at the listing stage (on- or off-market), it’s vital to market the property effectively. Polished and aggressive marketing stimulates latent demand by putting the property in front of the largest possible buyer audience and conveying the asset’s value and risk profile.

During the negotiation phase, it’s advisable to offer favorable terms and concessions where feasible. Enlisting the most capable brokerage, legal, escrow, advisory, and valuations professionals with proven negotiation, transactional, and regional valuation expertise is wise.

Sale-leasebacks are a popular approach for sellers when the gap widens. For sellers that occupy the property and don’t need to relocate, a sale-leaseback provides the opportunity to free up liquidity and maintain operations. The newly available capital can then be devoted to expanding and optimizing operations or held in reserve. This transaction structure also represents less risk for the buyer, who will have a guaranteed tenant with terms that offset economic risk.

Seller financing is another strategy for sellers to consider. Taking back a note on the asset allows sellers to command a premium price, particularly with rising interest rates and financing costs on the buy side. Seller financing also offers the seller tax deferral benefits on gains and passive income (principal and interest), with the potential to sell the note. The buyer benefits from this arrangement through reduced funding costs, bypassed LTV requirements, easier qualifying, and faster and less costly closings.

General strategies to get the best price as a buyer include bringing the most cash possible and focusing on raising equity to reduce financing costs and reliance on conventional lenders. Cash-heavy, quick-close offers have the best chance of acceptance with less-than-ask bids.

3. Narrowing the spread with data

In most cases, market and asset performance data that support your valuation and the assumptions it’s founded upon can sway the counterparty’s willingness to accept or move closer to your ask or bid.

Even where a qualified appraiser is involved, there’s still room for interpretation. Furthermore, the actual value is a moving target and is intrinsically tied to both parties’ value perceptions and risk/return expectations.

For sellers, performance, operational, and financial data regarding the property provides concrete evidence of expenses, occupancy, NOI, and other data points that will alleviate exposure concerns, validate the asking price, and demonstrate solvency and the upside. If the data doesn’t support the proposed ask, it can be leveraged to determine fair market value.

When internal data is paired with market data showing strong demand fundamentals, buyers develop more confidence and willingness to move closer to the asking price. Even when demand is on the decline, the data can clarify the trajectory and likely extent, allowing buyers to make informed decisions and fostering follow-through.

Buyers can also leverage market data to support their bid and assumptions, as well as see if the data justifies a higher offer based on potential rent growth and values in a future period after the market corrects.

Tools are available to facilitate the data collection, interpretation, and presentation processes. An automated data management platform is an essential resource that equips commercial real estate operators and investors with the insight to know where their assets, portfolios, and financials stand. With the data on hand, stakeholders can more quickly react to acquisition opportunities and bids and pivot rapidly to keep deals alive.  

 In addition to tech solutions, leverage your internal team and third-party advisors to assess the market, opportunity, and asset performance to ensure you’re not leaving anything on the table. 

Validation and confidence

While some transactions aren’t meant to be, there are plenty that can avoid the rocks and shoals by positioning assets, financing, and bids proactively with concrete data that supports value assertions and assumptions. Market and asset performance data provide evidence to validate valuations and instill the required confidence for both parties to move toward a successful close.

With cap rates rising and altering demand for office assets, it is critical owners and operators do everything possible to establish and maintain a competitive advantage.

There’s a fight to quality occurring where office tenants and investors are giving preferential treatment to Class A assets. Given favorable lease rates and plenty of available space and options, tenants opt for the best amenities, communication technologies, indoor air and environmental quality, and energy/water efficiency.

In this article, we’ll look at the state of the office market, how smart buildings generate greater value for all stakeholders, the four components of a smart office design, and how to implement the strategy for new and existing builds.

State of the office 

Office bore the brunt of the remote working trend spurred on by the pandemic. The U.S. National Bureau of Economic Research reported that remote working led to a long-run decline in office valuations of $453B, or just under 40%. During the height of the pandemic, some organizations stated working from home fostered an improvement in productivity.

However, a recent survey by Microsoft of 20K+ professionals found that 85% of leaders say the shift to hybrid work has made it “challenging to have confidence that employees are being productive.” 

Meanwhile, 73% of workers indicate they need a “better reason to go into the office than just company expectations.” It’s a controversial issue as many workers resist the return to the office and are fighting for the personal benefits of WFH (Work From Home).

Proponents of getting back to the office either full-time or partially include Tesla, Salesforce, Goldman Sachs, Netflix, Amazon, and many more. While there are viable technological and collaborative strategies to make remote work equally productive, the sentiment of many leaders is driving a return to the office. Employers cite the need for in-person collaboration and the onsite collective spirit that drives creativity and productivity.

As the health crisis becomes part of the operating environment, many public and private organizations are pushing for a return to the office. Consequently, demand is ticking up for office assets.

The value and components of smart office buildings

If employer attitudes to remote work are already changing and office leasing is improving, why bother making our office building ‘Smart?’

First and foremost, it’s about providing unique, differentiating value to the end user — the tenant paying the lease and driving revenue that fuels and justifies our operations. Here, we’re talking about employers looking at the bottom line in terms of the space’s conduciveness to collaboration, creativity, and productivity, as well as operational efficiency. 

Second, going smart appeals to ESG- and margin-conscious investors and checks boxes for associated criteria. A new survey by CBRE of 500 market stakeholders (investors) found that 53% of respondents favored deals incorporating smart technology. Likewise, 49% indicated the omission of smart features would have an adverse impact or be a deal breaker.

What makes a building ‘Smart?’

Deloitte defines smart buildings as “Digitally connected structures that combine optimized building and operational automation with intelligent space management to enhance the user experience, increase productivity, reduce costs, and mitigate physical and cybersecurity risks.”

Additionally, intelligent buildings achieve these four objectives:

• Uniting people in digitally connected spaces.
• Allowing occupants more control of building systems.
• Enhancing digital collaboration amongst in-office and remote workers.
• Facilitating the conservation of energy, water, space, and labor.

Current communications and building system technologies create value for tenants and investors, supporting a competitive advantage in a regional leasing and investment market. It gives businesses further justification and incentive to come back to the office and facilitates hybrid working models.

Specifically, tenants favor buildings equipped with fiber optic, modern teleconferencing equipment, and smart building systems to control doors, security, HVAC, and more.

Smart building systems also ensure thermal comfort by allowing tenants/users to tailor their climate zone to individual or group preferences. Additionally, energy isn’t wasted heating or cooling unoccupied areas. Light, movement, and hydrostatic sensors and monitoring systems further minimize consumption and provide optimal indoor environmental quality (IEQ).

And aside from the monetary considerations, providing tenants with a space that ideally suits their needs — based on their input and feedback — fosters tenant loyalty and lower turnover rates. Smart offerings make tenants feel valued and that you’re attentive to their needs.

Funding and planning smart features and improvements

Whether you’re working with an existing Class B/C asset to upgrade and reposition or building from the ground up, a smart design requires capital and planning.

With prevailing monetary policy and rising interest rates and cap rates, conventional financing at high LTVs and refinancing aren’t ideal options (as they would be under other conditions). The circumstances favor sponsors that can raise — initially or subsequently — the equity to fund the additional costs of smart and sustainable technologies. 

Institutional and accredited investors with dry powder (liquidity) are currently in the best position to implement or fund a smart building design or improvement strategy. The need for equity underscores the previously noted value/leverage that going smart provides in attracting investors mindful of ESG considerations.

A principal strategy to ensure results and control cost/time is the integrative design process — a central component of sustainable design methodologies.

It involves planning the implementation of smart building technology from the outset of the project and holding a design/re-design planning meeting with the owner/operator, investors, tenants, engineers, and all other parties involved in the process to gather input and feedback.

An integrative process ensures the requirements and preferences of the end user and owner are considered and that all design team members are coordinated. The result is that the project is more likely to be completed on time, within budget, marketable, and generate expected efficiency, market lease rates, and NOI.

Smart office buildings: A sustainable market position

A viable office investment and operating strategy is becoming contingent upon offering Class A assets with smart communications and building system technology.

As tenants and investors lean toward higher-quality, lower-risk, efficient assets, operators and sponsors answer the call by developing and repositioning assets to carve out a sustainable competitive advantage and market position.

Building a solid and intentional brand position involves many moving parts, but there’s one strategy you can apply in any situation — particularly when the alternatives aren’t feasible or practical.

Going the ‘Extra Mile’ is among the secrets (companion to the 1%/Kaizen rule) of extremely successful entrepreneurs in commercial real estate and broader.

Let’s look at what the principle entails, how it benefits operators, and simple strategies to go above and beyond in serving investors and tenants.

 1. The root of it

A little under a hundred years ago (1925), Napoleon Hill, a notable personal success and finance writer, distilled the concept of doing “more than what’s paid for” as one of his 17 principles in the Law of Success. He later developed the idea into the ‘Extra Mile’ principle, which he describes as the habit of providing “More and better service than one is expected to render and with a positive mental attitude.”

This notion may seem obvious, but it’s surprising how many professionals we encounter in our lives who are oblivious to this concept. I’m sure you’ve met at least a handful of people who only do what’s asked for and just enough to get by. When you think about those that have risen to success and wealth, the trait of going the extra mile is often apparent in their climb.

At its core, this principle is rooted in observations of nature. There are myriad examples in which life acts in multiples to ensure survival. Plants, fish, insects, reptiles, and birds reproduce in such numbers that regardless of the prevalence of predators, disease, and natural hazards, their continued existence is nearly assured (excepting for asteroid strikes and human interference). 

Many animals forage or hunt more than is necessary to get by and will do what it takes to find opportunity and resources. The commercial real estate business is no less demanding, and our work is quite literally how we survive, no matter how far removed from the plow, basket, or bow.

2. Practical benefits and manifestations

Going the extra mile precipitates many benefits for CRE operators. Hill developed the Extra Mile Formula to accompany the principle. Though not mathematically valid, it highlights the components of going the extra mile and their cumulative effect:

Q1 + Q2 + MA = C

Q1 represents the quality of service; Q2, the quantity of service; MA, mental attitude; and C, compensation. In other words, if we do the best work — more than what’s paid or asked for — and perform it in a spirit of positive service, we’ll have the highest growth and earning potential.

The formula makes perfect sense if we’ve been on the hiring or paying side of this equation. It applies equally to how we tip service workers as to how we compensate our executives and vendors.

What are the concrete manifestations of applying this principle as an operator/sponsor:

• Making a strong first impression.
• Creating rapport, trust, and goodwill.
• Fostering loyalty and buy-in among stakeholders.
• Building a competitive advantage.
• Establishing a superior track record.
• Generating leads with the best ROI: enthusiastic referrals.
• Improving performance and attainment of OKRs.
• Attracting and retaining tenants; optimal occupancy.
• Abundant capital and keeping investors on board.

The fact is going the extra mile doesn’t take that much more work. And when you put some passion into what you’re doing and see the positive response and appreciation from stakeholders, the business of CRE becomes a lot more fun — and rewarding.

3. What it looks like in practice

With the principle and benefits noted, how can we apply the concept in commercial real estate?

Start by always focusing on doing the best job for your existing investors and tenants. Of course, we must devote time and money to marketing and other business-generating activities. 

However, if we don’t keep our current stakeholders happy (i.e., generating at least the expected results), we won’t build loyalty, positive word-of-mouth, and the track record required to earn new business. Our foundation is the first group of investors and tenants that choose to take the risk in working with us when we’re getting started.

The next underlying component of going the extra mile is attentively listening to the needs and expectations of our stakeholders. We must possess a keen awareness of their desires, objectives, and values to produce the outcome and experience they’re seeking.

Let’s elaborate on what going the extra mile looks like in serving investors and tenants:

Investors

• Ask about their expected rate of return and risk tolerance and adjust/craft your offering accordingly.
• Under promise and over-deliver on returns. Be realistic and conservative with projections.
• Keep them in the loop. Provide frequent and detailed updates, reports, and financial statements backed by whole, accurate data.
• Implement a data management strategy and make investors aware of your commitment to leveraging technology.
• Utilize all the available tools to monitor, manage, and optimize expenses.
• Be transparent about your background, story, accomplishments, and values.

Tenants

• Regularly gather and encourage feedback from current and prospective tenants.
• Adapt your property, management style, space, and terms based on their desires, needs, and preferences.
• Provide more and better amenities and service than competing properties and operators.
• Offer a portal that allows tenants to communicate with each other, management, and staff.
• Show your appreciation for tenants by holding events/parties and giving unexpected perks.
• Be fair with rental rate increases. Do track market rates but keep hikes reasonable (2-3%), and only increase if the market justifies it.

Everything we got

We can do a lot to support the growth of our NOI and portfolio. Some of the common strategies, including marketing/solicitation, repositioning, expense optimization, and lease rate increases, are effective.

Yet, the simplest, most cost-effective, and human way to scale our commercial real estate businesses is by giving our investors and tenants everything we got and doing it with joy. 

Even if we’re not the highest-return or least expensive option in the market, stakeholders will partner and stick with us because we recognize, respect, and appreciate their needs and provide a fantastic experience.

What do you do best as a commercial real estate operator and investor? In other words, what sets you apart and gives you a competitive advantage — putting you ahead in the market?

When you can answer these questions, you’ll have identified your core competencies. I say that in plural because we all have more than one strength, and a solid competitive advantage is often a combination of abilities.

Building a competitive advantage in CRE is contingent on knowing what our strengths are, focusing and developing them to give us the edge, and then relating that to our prospects and community through our value proposition and brand positioning.

Here, we’ll consider how to identify what differentiates you and put it to work to build your competitive advantage and brand.

1. Identify what you do best

We may feel we know, and probably have a good idea, what areas in business we’re good at. Our customers, partners, and other stakeholders will often sing our praises, and throughout our careers and enterprising-building efforts, we’ve discovered where we shine. 

Yet, developing a robust value proposition/advantage and effectively articulating it requires digging deep to reveal all our core competencies. And just identifying them isn’t adequate — it takes quantitative and qualitative data to give us usable insights that will point us to where we need to focus and improve to create pitch materials that provide concrete evidence of our abilities.

Some of the common competencies in CRE include:

• Strong negotiation skills.
• Running assets and portfolios lean.
• Capably and consistently attracting tenants (marketing).
• Understanding tenant and investor needs/desires/preferences.
• Deal analysis; determining feasibility.
• Reliably raising substantial capital.

What’s notable among these strengths is they all result directly or indirectly in strong/growing NOI and stakeholder satisfaction. However, knowing that margins are strong isn’t a compelling enough insight to create a good argument for investors and other parties to get involved with your venture or assets.

They want to know more. To understand what underlying strengths drive that performance (i.e., quantify and objectively characterize them), we need a body of data. Fortunately, the data is there, and when we have it organized and centralized, we can reference and analyze it to spot where in our operations we’re excelling (and where we need to optimize). 

For instance, if we have a robust data management system and policies, we can quickly run reports to determine our most significant cost efficiencies, such as what properties are doing the best and what factors drive the strong performance — lease rates at market, low PM costs and Capex, minimal tenant turnover, etc.

From these quantitative insights, we may see that some of our core competencies are running lean and keeping tenants interested and satisfied. And with data to back up our claims, we can make a justified pitch to investors.

2. Develop your competitive advantage

There are many competent operators and sponsors in any market, so gaining an edge and winning capital and tenants takes everything we can muster. Knowing our core competencies is important, but bolstering, refining, and synergizing them is even more crucial to create an unbeatable competitive advantage in your market.

Where you find strengths, work to bring out the best in your teams, acquire the resources and talent to take them further, and refine your processes. Also, look for opportunities in related areas of operations that, if optimized and strengthened, would create so much value that it would be difficult for stakeholders to dismiss as commonplace.

For example, consider these strengths that, if taken to their peak and paired with other competencies, will focus and differentiate our value props:

• Sourcing value-add opportunities + 
  • Identifying markets with stable demand factors.
• Providing design and amenities that tenants actively seek +
  • Offering property/tenant management systems and a company culture that keeps tenants satisfied and feeling valued.
• Maintaining lean property management expenses +
  • Designing/developing/redeveloping for efficiency and minimal environmental impact.
• Recruiting and retaining the best talent in each functional area +
  • Developing a workplace open to and uniquely supportive of all team members.
• Leveraging available technological resources +
  • Capturing, centralizing, and analyzing data to support high-quality strategic decision-making.

3. Position your brand to harness the advantage

Now, you know where you’re the leader, have formulated a winning competitive advantage, and have the data to back it up — is that enough?

If you’re relying solely on your network or local community to raise capital and find tenants, and only share your offerings with those groups, you might be good to go (for the short term).

But as you scale and take on more acquisitions, capital and tenant requirements will rise significantly. As you grow, what you can draw from the network you’ve built organically (and the local tenant base aware of your property and development activity) won’t be sufficient.

You’ll be pushed to reach further — with your brand as your emissary. Purposely expressing in your marketing what you do best, who you do it for, and why stakeholders should buy into your organization and properties is essential in garnering attention, building credibility, and obtaining commitments from people and organizations you don’t have preexisting relationships with.

Besides, those who are part of your network will appreciate and respect the thoughtful and well-supported expression of what differentiates you, earning their continued faith and loyalty.

Opening new markets

Knowing where we excel, doing what it takes to go further, backing up those strengths with data, and expressing those competencies, puts your commercial real estate enterprise in a position to attract the capital, tenants, and talent it takes to build an economically and strategically sustainable venture. 

Effectively relating the value you can uniquely generate for your current and potential stakeholders is the zest that builds credibility in your industry and community, fosters long-term business relationships, and opens new markets.

The only way to know if you’re operating at the peak is by comparing the performance of your commercial real estate properties and enterprise to comparable assets in your market. 

While conventional wisdom on a personal level is that we shouldn’t compare ourselves to others, in business and CRE, benchmarking is essential in reaching the top of the bottom line. Whether in a geographic- or a niche-based context, CRE benchmarking is a crucial decision-powering tool that provides insights that guide us toward optimal efficiency and performance. 

In this article, we’ll talk about the value of CRE benchmarking and how it can help you take your properties and enterprise to the next rung of growth and NOI.

1. Why CRE benchmarking?

How is your company performing relative to similar firms in your industry and niche?

It’s an important question to ask so we can get a better understanding of our operational potential and weaknesses. We may be either falsely satisfied with or overly critical of our performance without examining how competitors and peers perform in the same asset class and market. 

To address this business need, benchmarking as a concept was developed nearly 100 years ago and was notably implemented by Xerox in the 1970s to compare its production costs to Japanese competitors.

Leveraging the insights it harvested from the data, Xerox won an American award in 1989 for quality while also reducing expenses. Benchmarking subsequently became popular in the corporate world in the 1990s.

For clarity, benchmarking is the process of comparing the quantitative or qualitative performance of one of our assets or businesses against that of others we own or those operated by third parties. 

To make the comparison, we gather data on the various metrics used to measure the performance of properties and ventures. We assemble this data for our subject asset as well as that for external assets. With this information, we can identify where we need to improve and optimize — and where our core competencies and competitive advantage prevail. 

2. Collecting and analyzing the data

We can aggregate the data we need for CRE benchmarking in a variety of ways, including internal/primary research, private firms that conduct benchmarking, and industry organizations that draw operating data from their members.

To start the benchmarking process on the internal side, we need a way to collect, store, and analyze the data. We can do this manually and hire a team to conduct and oversee the process; however, this can be highly time-consuming and costly. Alternatively, we can leverage data management systems specific to our industry that handle these processes continuously in the background.

Getting set up for the first time can take a bit of work, but once implemented, a data management system keeps the knowledge at hand and ready for application in the benchmarking and other decision-making processes.

3. Internal benchmarking

If you own a set of assets of the same type, whether commercial real estate properties, businesses, portfolios, or operating departments and teams, you can compare their performance.

With the operating information centralized and organized in data management software, you or your team of analysts can spot the most significant variations in performance and start to investigate the causes.

In the framework of CRE assets and operating companies, a few of the typical metrics to contrast include:

Income: 

• Net operating income (NOI).
• Net effective rent.
• Gross rents.
• Loss/gain to lease. 
• Rent adjustments. 
• Gross potential rent. 
• Ancillary revenue. 

Expenses:

• Repairs and maintenance. 
• Leasing expenses. 
• Operating expenses. 
• Taxes and insurance. 
• Management fees.
• Utility costs.

Operations:

• Vacancy/occupancy rates.
• Tenant turnover rates.

Looking at these data points across our assets and departments/subsidiaries, we can see trends and opportunities and form actionable insights regarding how to operate more efficiently and enhance our valuations and NOI.

We may realize that one or a group of our assets aren’t performing as well as another due to factors we can easily remedy. Or we might decide that one market holds greater potential than another and start to reallocate our capital toward building our portfolio there. 

Whatever the case, we’ll be moving forward informed and purposely, armed with concrete data to support our actions and make our case to investors.

4. External benchmarks

Once we have our internal performance data together and analyzed, we’re ready to compare our properties and enterprises to third parties. External benchmarking allows us to observe and gauge against how other operators across geographic areas and business models perform. 

The broad data provides objectivity and sufficient sample size to draw tempered conclusions regarding our performance and what potential exists to optimize our assets.

External benchmarks can also help us identify markets ideal for future investment and know what to expect based on a robust, real-world data set. In addition to opportunity, we can also see where the most significant risks are based on vacancy, late rents, and eviction rates in other metros.

CRE Benchmarking: scale with precision

Leveraging available internal and external resources and technologies, we can efficiently gather data, enhance our awareness, and make informed moves that enable us to scale with precision and managed risk. Growth-minded operators and investors incorporate benchmarking as an integral component of their operating and decision-making processes.

Let’s talk limiting beliefs. We tend to have preconceived notions about what we are and aren’t capable of doing in life and our commercial real estate careers.

Some of us are supremely confident in our capabilities and potential; however, most have at least a little doubt hidden away that we may not be aware of or want to acknowledge.

And sometimes, the beliefs holding us back we don’t recognize as limiting because they’re so prevalent in society.

Let’s talk about how to recognize the assumptions we make that limit our growth and how to challenge them.

Recognizing what’s holding us back

Some limiting beliefs we develop early in life (those we adopt from our family and community), and some as we get an education and work through the challenges of building our careers and businesses. Often, the beliefs we subconsciously accept as fact are those we form in our socialization as children and young adults.

Many of us who have found success got there despite friends and loved ones tactfully warning us of the risks and perceived futility of the paths we’ve pursued. Yet, for one reason or another, we see the light at the end of the tunnel and keep going. 

So, we’ve made it, right?

Are we satisfied with what we’ve accomplished?

Perhaps.

“Financial and professional growth isn’t everything.”

That’s a common rationale we employ to become content with the status quo. But reflect for a moment: Is there a goal you’ve dismissed as unnecessary for your ‘happiness’ or ‘fulfillment?’

Indeed, your determination may be valid and justifiable. However, think about an instance when you realized that a goal you wanted to achieve was attainable.

How excited were you, and how quickly did you want to start? 

You probably couldn’t wait to take action and had a clear vision of that success. 

Did you go through with it? Maybe you did, and that’s how you got to where you are.  

If you didn’t, doubt likely began to pervade in the following days as you started to mull over all the reasons it couldn’t work out. It may have been the correct decision and the wise move, but reflect on the experience and consider if the goal wasn’t feasible. 

Have your subsequent experiences proven that your belief was incorrect?

If so, carry that insight into your decision-making process regarding opportunities you’re evaluating that hold the potential to grow your career, portfolio, and enterprise.

Common limiting beliefs 

There are many limiting beliefs in commercial real estate, and for the sake of illustration, here are a few of the common ones:

• I don’t have the education or experience level to do this.
• I won’t be able to raise the required capital.
• I don’t have a track record in CRE or this asset class.
• I’m too old/young.
• I don’t know anybody in the business — I don’t have the connections.
• My family/community won’t support this course.
• It’ll take too long.
• It’ll be too difficult or time-consuming.
• The market will crash — I’ll lose everything.

The thread you’re probably starting to see here is that all of these have apparent solutions. But when we’re in the moment or just starting our careers and businesses, these feel insurmountable, and we find reasons to justify these as valid limitations.

Developing an anything-is-possible mindset

Once you’ve uncovered a limiting belief, go to work shifting your mindset and building a support system that will make it possible to overcome.

Test the assumptions and rationales behind the belief. There may be actions and team members you hadn’t considered that could vaporize constraints.

Let’s look at some of the familiar limiting beliefs noted previously and see how we can conquer them:

Lack of education/experience

• Partner with other professionals and firms in the industry.
• Hire a team that has the skills to pull it off.
• Take an entry-level role in the industry to learn the basics and gather practical experience.
• Go back to school.
• Find a mentor.

Inability to raise capital 

• Find partners with a track record, liquidity, and good credit.
• Start small and work your way up to bigger deals and ventures.
• Build a network — participate in your industry community.

 Feeling too young or old

• Consider the numerous examples of successful entrepreneurs at both ends of the spectrum.
• Like many other concerns that restrict growth, a team with more experience or energy can bridge the gap.

Not having connections

• Get out there and network — join local and national organizations relevant to your niche.
• Join an investment club or mastermind group.
• Volunteer/participate in civic organizations.

Lacking the support of family/community 

• Talk it over with them and be open about your passion.
• Go forth bravely, even if they disapprove — trust and honor yourself.
• Keep it to yourself and surprise them with your success!

Long timeframe

• Anything worth doing will take time — shift your mindset to the long game.
• Work towards goals you’re passionate about, and the time it takes will feel less important.

Perceived difficulty and time demands

• Share the challenge and load with a qualified and enthusiastic team.
• Visualize your goal and the reward — it’s worth what you’ll pay.
• Sometimes, just getting started is the hard part. Once you’re rollin’ in high gear, the resistance will feel lighter. 

Economic/market fears

• Opportunity exists in any economic climate.
• Some of the best deals emerge during recession.
• Assemble advisors and a strategic plan to create contingencies and prepare for any possible outcome.

Of course, this isn’t a comprehensive list, but whatever the challenge, put all your concerns and what-ifs on paper (or screen). Think through all the possible rebuttals to your beliefs and also explore why you may be right. You owe it to yourself to conduct due diligence in choosing a course of action.

Trust your intuition and keep going

Faith is important but trust your gut. If, after reasoning through everything and consulting with mentors and experts, you don’t feel it’s the right path, move on to other opportunities with the same objectivity — and don’t give up!

For most commercial real estate investors, the ability and means to assess and manage risk is at the top of the list of concerns when starting or scaling a company or portfolio.

Many of our questions begin with “What if X happens?” or “How will I know if X?”

Fortunately, today more than ever, there are accessible technologies available to help recognize and mitigate the risks we face in building and operating a commercial real estate enterprise.

In this article, we’ll talk about some of the external and internal risks you can manage with CRE tech.

1. Risk in the operating environment

It’s an extremely dynamic environment we’re working in. We’re dealing with a multitude of external risks beyond our control and many data points to track. Depending on the complexity of your organization, you may need a team to manually identify and monitor all these factors.  

On the environmental and social sides, there are old- and new-fashioned media outlets with print or digital feeds to which you can subscribe to stay up-to-date on what’s evolving.

You can also retain research and analyst firms to track these matters on your behalf, report what is most relevant for your organization, and provide insight and direction to inform your decision-making. 

Perhaps most importantly, concerning social trends, we must pay close attention to what consumers (tenants) demand regarding value, amenities, inclusion, and sustainability to reduce the risk of economic obsolescence of our properties and enterprises.

Regarding economic and market factors, there are data management platforms, some specific to commercial real estate, that draw information from public and private sources. With these, you can set the system to track relevant data points and provide reports and alerts automatically. These tools allow you to make the best strategic moves to avoid exposure while also running lean.

While not a new technology, many jurisdictions offer portals/databases where you can access zoning, building, and permitting information, as well as pending legislation (local and national) that may impact your operation.

In conducting due diligence for an acquisition, this data can be vital to avoid developing a project that will not conform or may be subject to adverse action at some point in the foreseeable future (eminent domain, condemnation, special assessment, new environmental regulations, etc.).

2. Financial exposure

The turbulent waters of finance represent a blend of internal and external factors for which technology is a life-saver. 

On the most practical side of managing financial risk, we need a qualified accountant to help prepare financials and taxes. Still, for them to do their job accurately and efficiently, we need data management and accounting software to continuously collect, sort, and flow our financial data into the statements required to prepare tax filings, maintain compliance, and provide evidence of performance to investors.

Similarly, it’s fruitful to have entity management software lend a hand in compiling our entity documents and tracking filing requirements and deadlines.

Possessing a solid understanding of our financial situation also allows us to reduce the risk of budget overruns and negative NOI by consistently informing us of the expenses we incur, the cash flow we generate, and ensuring we have enough financial reserves and liquidity to cover unexpected capital expenditures, recession, and periods of low occupancy. 

When we’re managing an array of properties across a portfolio, automated monitoring and consolidation of loan and lease data helps us know when it’s time to exit, refinance, or exchange to ensure we’re taking on manageable economic risk in terms of rising interest rates, shifting lease rates, and increasing maintenance and materials costs. 

Loan data is particularly vital to continually monitor so we’re aware of variable rate instruments in our portfolio, can factor prepayment penalties into our decisions, and keep an eye on our debt to equity ratio to keep us viable and reduce our liquidity risk (risk of not being able to cash out). 

And since we’re typically using many technology vendors to manage and optimize all the moving parts of a commercial real estate operation, there’s also the risk of loss resulting from underutilized or redundant services (Shadow IT). Vendor and subscription management tools exist to mitigate this exposure.

3. Property-level risk

In addition to the risks we face in the environment and financially, there’s potential exposure on the individual asset level to manage. 

On the front end of the development process, Building Information Modeling Systems (BIMs) allow architecture, design, and development teams to coordinate and accurately model the precise amount of materials, time, and capital it’ll take to build a structure, further reducing the risk of exceeding budget and time constraints.

Moreover, BIMs support sustainable design initiatives and reduce the long-term risk of excessive energy consumption, high maintenance costs, impact on the natural environment, and human health hazards.

Post development, Facility/Building Maintenance and Management systems prevent quarterly surprises on the cash flow statement and ensure that we keep our assets in top condition (to avoid deferred maintenance that will increase CapEx and suppress valuations), stay free of hazards that contribute to liability for injury, and skirt functional obsolescence that will affect marketability and occupancy.

Also, implementing a data management solution that integrates with property management platforms and pulls relevant data puts us in an ideal spot to oversee leasing, operations, marketing, and tenant relations to minimize our turnover/re-leasing risk and legal exposure due to activity that may be a breach of law or best practice.

Upside for the wise

While CRE is a risky business with plenty of factors to address and mitigate, it’s still an industry with upside and safety for wise operators and investors. To play it smart, team up with the best professionals in the industry, share the risk with other investors, and leverage all the technological tools available to assess and manage risk. Then, you’ll be in an excellent position to make strategic decisions that reduce your exposure and lead to the top.

With the dynamic economic conditions we’re experiencing, we must be fleet-footed to capture time-sensitive opportunities. Moving fast while making well-formed decisions that reduce our exposure is the linchpin of CRE growth.

Even in a ‘slow moving’ market, plenty of opportunistic investors compete to acquire deals. And when you’re selling an asset or contemplating and preparing to do so, you don’t want to miss out on the ideal buyer to another seller. If a refinance is on the table, particularly with rising rates and the FED getting more conservative, prompt decision-making is crucial to lock in today’s relatively low rates.

In this article, I’ll share a few tips to speed up your time to action and achieve the best outcome on the purchase, sales, and refinance sides of commercial real estate.

1. Acquisitions

The opportunity to acquire an asset in commercial real estate is always available in only a narrow window of time. From the point at which we find an opportunity to the day we’re ready to make an offer, much can change.

And though commercial real estate transactions happen on a longer time scale than other types of assets, including residential properties, nothing is static in our sphere. While some assets may, on the surface, appear to be hidden gems and give us the sense that we have ample time to consider them, we can be sure that once a seller or broker realizes the gold they’re sitting on, they’ll be looking for the highest-bidding and most prompt buyers.

Consequently, the speed with which an owner or operator can form the purchase decision will make or break a potential deal. Buyer credibility is vital, too, but all things being equal, the winning bid will go to the investor that leaps first and puts cash on the line.

All that considered, what can you do to be ready to strike?

• Request property financials upfront and insist on their completeness.
• Line up capital — equity and debt — and get your financials together in advance.
• Know the market before evaluating the property.
• Have a plan for the asset, and be ready to demonstrate your intent to the seller and community stakeholders.
• Get familiar with local regulatory requirements and trends (zoning, permitting, etc.)

2. Selling

Of all the individuals and entities considering buying your property, only a few prospects are the right fit and qualified, capable, and willing to follow through.

So, when that ideal buyer comes along, everything needs to be in order on your side so you can say ‘Yes!’ Hesitation or unpreparedness will keep your property on the market and start to wear on the perceived value of the asset.

Additionally, it’s not just about accepting the offer but also providing the prospective buyer with everything they need to evaluate your property and make a confident purchase decision — and convince their finance partners of the deal’s viability.

With that in mind, here are a few tips to hasten the move on both sides:

• Develop realistic pricing and return expectations based on market data.
• Leverage a data management platform, so you immediately have all the data and organized information the buyer needs.
• Provide complete financials, including a detailed rent roll.
• Get a commercial appraisal and inspection in advance.

3. Refinance

With rates on the rise and the FED tightening monetary policy, you can count on increasing lending costs over the next few years. To reduce your long-term economic risk, it’s best to secure a new loan while you’re able. Even if we’re not heading for a cataclysmic reset, we’re certainly going to experience an upward trend in rates that will adversely affect your NOI.

Fortunately for investors and operators, increasing lending profitability will mean expanding availability of capital. To take advantage of this situation, we need to quickly ascertain each of our properties’ loan details and statuses while also considering market data to determine if now is the appropriate time to refinance.

And besides holding onto a relatively low rate, the conditions in your market may create good opportunities to allocate any cash you pull out to make property improvements that will better position the asset to attract tenants and maximize NOI and valuations. Alternatively, you can put that cash to good use in acquiring emerging under-valued opportunities generated by the fluxing economy.

Here are a few recommendations to be ready in advance:

• Implement data management tools to quickly understand your assets’ financial performance, value, and loan details, so you know if and when it’s the right time to refi.
• Have the financials and a post-refi plan available to make the underwriter’s job easier and faster.
• Get a commercial appraisal and inspection in advance.
• Analyze the market to determine if continuing to hold the asset is the best choice or if it may be an opportune time to reallocate to higher-performing assets.

Move with certainty

Acting fast in commercial real estate is a matter of starting your data collection and due diligence as early in the decision-making process as possible. When you have all the property, loan, and market data ready to go and you’ve done your analysis beforehand, your team will be able to move with certainty toward the ideal path in acquiring, exiting, and refinancing. Start preparing today by optimizing your data management strategy and practices.

Stable and growing NOI relies upon happy tenants, and tenant satisfaction is crucial to building a portfolio that minimizes turnover and continually attracts tenants at optimal lease rates. Three fundamental components of building and maintaining goodwill with your occupants, both residential and commercial, are good communication, a conscientious culture, and spaces that offer operational efficiency.  

Fortunately, delivering a positive experience and efficiency for tenants is simple when you build the principles we’ll talk about into your operational strategies at the outset.

1. Communication and listening to tenant needs

Ultimately, tenants and their organizations are just people — individuals and groups that want to be heard and understood by the parties they choose to associate with. Each of our tenants is not only buying into a leasing relationship but also our organization and vision. Once they sign the line, our decisions and actions will impact them, directly and indirectly.

Open, two-way communication is a big part of building the rapport needed to maintain a positive long-term relationship with tenants. We must listen, consider, and respond to let tenants know we understand their position, expectations, and needs. 

In essence, listening is another form of data gathering and analysis. But it’s not just data points and logic (essential though they are); we’re looking at the qualitative aspects of building a relationship that requires emotional intelligence and a corporate culture that values and respects the human side of conducting business.

With the data we collect through listening, we can create spaces, amenities, processes, and a culture that supports a positive personal experience for our tenants. Current digital communication technologies and property management platforms simplify this initiative; however, don’t overlook the value of one-on-one, in-person communication throughout the relationship with tenants. Holiday cards and feedback requests, though mundane, still go a long way.

2. A culture and brand that cares

The preceding considerations are most true today, as tenants, and consumers in general, emphasize the experiential, social, and environmental implications of who they partner with. Tenants, like investors, are just as concerned with who we are as with the values we represent and project in our messaging.

We must live and operate in a way consistent with our values (i.e., with integrity) and those of our occupants. The rising influence of ESG (Environmental, Social, and Governance) principles supports this shift in consumer behavior. In addition to acting in the best interests of our tenants through listening and operating accordingly, it’s also important to minimize our impact on the natural environment. 

Few today would be willing to lease a space that displaced native wildlife or vegetation during construction or creates an excessive carbon footprint. On the human side of the sustainability equation, living and working spaces that support health and productivity are also vital to the retention — and success — of our tenants.

When planning your operations, or taking stock of your current brand and culture, pay attention to the prevailing winds of tenant sentiment. Consciously build a brand that embodies and clearly expresses your values, using language consistent with that of your tenant base (current and prospective). And don’t forget about diversity, equity, and inclusivity (DEI) as essential social elements of our brands and operations — it’s top of mind for consumers, investors, and talent.

 3. Staying competitive through efficiency 

Conscientious as we may be, the bottom-line impact of running lean from an energy and water efficiency perspective is equally significant and influential in tenants’ decisions and tenant satisfaction.

With new development and vast vacancy in particular asset classes, tenants have plenty of options. Given a choice, none would opt for spaces that will incur excessive operational expense (or thermal discomfort and poor indoor environmental/air quality).

Whether planning new construction, adapting a current build to a new use, or renovating an existing structure, prioritize green building strategies to maximize appeal and align with tenants’ values. When implemented upfront, the additional cost of efficient design is marginal, and the long-term payoff in optimal rents, occupancy, and retention is substantial.

Additionally, implementing building information modeling, property management, and data management tech throughout the development and operations lifecycle helps us design for efficiency and maintain lean operations.

Tenant satisfaction: the cornerstone of CRE success

Content tenants are the cornerstone of a successful commercial real estate operation. Consequently, we need to meet their needs and expectations personally, socially, and economically. 

Communicating openly, listening intently, aligning with tenants’ values, and delivering efficiency builds rapport, lasting relationships, and bottom-line benefits that position our brands to generate long-term loyalty.

If we don’t have a predetermined exit plan for a particular property in our portfolio, we’re continually facing the decision to let our money ride or cash out and reinvest in higher-performing commercial real estate assets. But how do you know when it’s time to switch to a higher-performing asset?

Indeed, there are other options and asset types, but for our discussion, we’ll focus on the disposition of a currently held property and the acquisition of a replacement asset.

When we have all the information available to make measured decisions, the choice is straightforward. However, without reliable data on the performance of our property and the regional market outlook, it’s unlikely we’ll know when it’s time to sell or exchange — or if it’s the best decision.

Accordingly, let’s talk about some of the factors to consider and how we can pull the data together to identify and support the best possible course. 

1. Property data points for performance

Each of our properties has a story to tell. That narrative is coded into the asset’s operating and financial data. If we listen carefully, we’ll learn how well we’re attracting tenants, how efficient we’re operating, and how much we’re making or losing.

Of course, the principal metric we need to watch is NOI. However, we need to dig a little deeper. While it’s useful to know whether our NOI is positive or negative, it’s more fruitful to see how our NOI changes month-over-month, year-over-year, and how much margin we’re generating per unit and square foot.

With that insight, we can determine if we’re headed in the right direction, at what rate, and develop a baseline to compare with our other assets and potential acquisitions.

 Operating expenses are also a top concern in evaluating a property’s long-term role in your portfolio and are an inherent component in calculating your NOI. Rising operational costs due to functional obsolescence associated with aging building systems and excessive Capex (significant maintenance costs) can be a solid signal to consider alternative assets. As with NOI, the data can tell us how much each unit costs in upkeep and facilitate comparisons with other properties.

We also want to know how competitive we are in the marketplace. Are our tenants boasting about the great deal they got by leasing our below-market units? Or are they paying fair market rates for what we’re offering? Property-level data can contribute to answering these questions as well.

Like NOI, it’s valuable to track how our occupancy rates are changing. The property data may not tell us why our vacancy rate is increasing or declining, but it will let us know if we need to look at external factors to determine the cause.

Suppose we find that our occupancy and NOI are falling despite our property being in top condition, running lean, offering the most desired amenities, and holding a prime location. In that case, it could be something beyond our control and it may be a good time to exit and seek assets and markets with more upside.

Potential or current delinquency is also something we need to monitor by tracking and reporting our loan data. If we’re headed for delinquency, particularly when it’s incurable due to circumstances, it’s a pragmatic choice to cut our losses, sell off, settle the debt, and move on to the next project — before our credit rating and reputation take a dive.

2. Staying on top of the market

Now, let’s look at data points for the external factors that can push us to exit. Prevailing lease rates are chief among these. There’s not much we can do when rents are sliding downward.

Sure, we can lower our lease rates if demand for our asset class prompts it. Yet, unless operating costs are also falling (not likely the case with inflation and rising supply and energy prices), we may be left to consider value-add assets in the same region or properties in markets with more favorable conditions.

Though not much concern for most asset classes today, falling property values also don’t bode well for an ongoing hold. Cap rate compression is a related factor that can influence our decision.

When rates are pushed down by excessive demand and valuations are rising, it may not be an optimal time to consider new investments where the potential income and margins will be restricted. In this case, the best course may be to hold and optimize our rents and expenses.

Other regional trends to consider include growth (or contraction) in labor supply, population, median income, industry inflow, and emerging regulation. Economic obsolescence or decline in value due to factors external to the property will also influence our strategies.

Here, we need to evaluate how our asset measures up to or aligns with tenant expectations, building codes, environmental standards, and other concerns that may erode value despite our property being in relatively good condition.

3. Making the data accessible

Being aware of all these data points is one thing, but bringing that information together and making it available to power quick-pivot decisions is another.

Even if you have a team or teams dedicated to collecting property and market data, it will be a time and money-consuming proposition to maintain the initiative and deliver prompt insights. For small and mid-market operators retaining this staff may not be practical.

Here’s where data management technology bridges the gap in creating a consistent flow of property- and market-level intel to power informed and rapid decision-making at a feasible expense.

When you want to know how each asset is performing across your entire portfolio to identify the laggards, automation via a data management platform delivers instant rent rolls, lease summaries, estimated net proceeds from a sale, and other vital operational and market data points. 

Break the barriers to scale – know when it’s time to switch to a higher-performing asset

In the history of commercial real estate, there was never an eight-figure portfolio consisting either entirely or in significant part of underperforming properties. Knowing when to let an asset go is among the most important decisions investors and operators make in scaling their portfolios. 

Though an individual asset’s NOI may be positive, we may be losing out on the unrealized potential of our capital by not putting it to its highest and best use. Property and market data distilled with speed and efficiency puts us in the best position to recognize the right time to make our exit and switch to a higher-performing asset.