The world has progressed from a period where tech and real estate sporadically intersected to a point now at which they are almost fully integrated. Each tech innovation further erodes real estate’s independence from the digital realm. Today, the stage is set for the metaverse, another technology to transform our industry as we know it. 

The metaverse has been a hot topic within the tech and real estate industries recently. News of real estate sales in the metaverse topping half a billion dollars in 2021 and major CRE firms migrating some of their operations into the virtual space demands an exploration of its impact on the sector’s future.

In this article, we investigate how the emergence and advancement of the metaverse are poised to revolutionize commercial real estate. 

What is the metaverse?

The metaverse is a network of virtual realities where people connect through virtual 3D spaces. It is similar to the internet but represents the next stage of our digital evolution. Web 1.0 was the dot-com era, in which the modern-day website became functional and accessible to the public. 

Web 2.0 ushered in the social media era, introducing radical ways for people to interact with colleagues, family members, and friends — mediums that transcended physical proximity. Conceptually, it’s Web 3.0. However, unlike its predecessors, it encompasses an entire world that exists digitally.

Further, the metaverse has enabled many organizations to create cyberspace for themselves that exists exclusively online and is distinct from the real world. In the metaverse, visitors can exchange their real-world dollars for digital coins and currencies relevant to each space and use them to buy virtual land, clothes, and other intangibles. 

But its application is still in a rudimentary stage, with experts predicting several years for us to harness its full, crystallized potential. In the interim, though, companies across the whole spectrum of markets are vying for a stake. 

Commercial real estate brokers, private equity firms, investment firms, and more have joined the race, grabbing as much virtual real estate as possible and inking million-dollar deals. The metaverse is currently hosted across different platforms, with the top three being Decentraland, the Sandbox, and Somnium Space. Interestingly, Facebook renamed itself Meta so that its main operations are aligned and synonymous with these advancements.

Jumping into the metaverse isn’t a huge leap 

Life in the metaverse is not a huge leap for the average person. For starters, platforms, such as Fortnite, Minecraft, SecondLife, and World of Warcraft, have long existed. But visualizing these platforms in a non-gaming dimension, we begin to have a clearer picture of the trajectory and scope of the metaverse and its potential to remold our traditional notion of living and working. 

Additionally, the emergence of the metaverse today is somewhat fortuitous considering recent trends. Since the onset of COVID-19, consumers have grown accustomed to operating within a digital world. According to the United Nations Conference on Trade and Development, more than half of people across the six continents use the internet for shopping, healthcare, and entertainment. 

Even the prime target audience for the metaverse, those aged 30 and under, have already adopted all the foundational habits of life in a metaverse. Live streaming concerts, presenting quarterly updates on Zoom, and catching up with friends via social media are a few examples of humanity’s fondness for digital interaction. 

Investors buying into the virtual realm

Real estate companies are committing millions of dollars to transform the metaverse from concept into reality. But why bother with cyberspace when we have real-world properties as tradable commodities? Because humans unceasingly demand space in real life and in the virtual domain. 

In anticipation of future demands, formerly traditional businesses are diversifying. This level of activity informs analysts’ projections that commercial real estate’s next notable growth in the coming years will be recorded in the virtual universe. Owners and operators are developing faith in the convenience and fascination that the metaverse offers.

Fundamentally, the metaverse is expected to facilitate certain experiences previously exclusive to the real world. We anticipate replicas of restaurants, entertainment venues, apartments, offices, meeting rooms, convention centers, schools, etc., on virtual reality platforms. 

One implication of creating these “digital twins” is that real estate owners in the virtual world will be able to rent to, lease to, and develop spaces for a global audience. Indeed the potential for CRE growth in the context of the metaverse is limitless. Major commercial real estate firms are already seizing the opportunity. Last year, the first ever metaverse real estate investment trust earmarked $15 million to buy, lease, and sell virtual real estate. 

A frontier worth exploring 

The revolution of virtual apartment tours and showings by Zoom will pale in comparison to the impact the metaverse will have on commercial real estate. For CRE firms looking to stay in touch and step with their clients, adopting the metaverse will be a must. 

The metaverse presents implications that will completely change the way consumers shop, seek entertainment, and even live and work. Needless to say, no matter what niche your firm specializes in, the metaverse is a frontier worth exploring.

COVID rocked the globe to a melancholy beat. But digging deeper, we see the pandemic recalibrated many of the world’s dynamics, with the real estate industry experiencing its share of the effects of this reset. Now, employers in commercial real estate are realizing that hiring technical individuals is much more competitive than in the past. To overcome the staffing difficulties, CRE firms need to be up to date with and continually adopt new technologies and innovations to remain competitive in today’s fast-paced business environment.

That is, the stakes are high — extinction or subsistence are equally possible — so it’s imperative managers hire qualified individuals with the right tech skills. But even amid these personnel shortages, some businesses are adequately staffed with tech experts, a situation they engineered with diligent, targeted recruiting strategies. 

Real estate companies will be much more effective in hiring technical individuals if they are proactive and design well-structured interviewing and onboarding processes that establish rapport, build trust, and convey organizational values and culture. 

In this article, we’ll look at how to differentiate your operation in the labor market and how to use an interview to convince tech professionals that your brand and working environment will fulfill their personal and career objectives.

Today’s highly competitive hiring environment requires a new playbook

There was a time when physical borders allowed companies to cherrypick the best minds in their regions — not anymore. 

The advancement of the internet and global connectivity has eroded that edge and equalized the labor landscape so that hiring transcends geographical barriers and technical duties can be performed remotely from anywhere — coffee shops in Barcelona, coworking spaces in Denver, living rooms in Antananarivo, etc. 

This new setup opens the path for tech talent to launch or further their careers with startups, midsize organizations, and conglomerates all over the world.

The implication of this reciprocal access — talent ⇋ companies — is that businesses are competing with not only local entities in the same sector but also global firms in other industries. And given humanity’s relentless attempt to digitize every operation and supplant workers with AI and robotics, tech staff and their skill sets will remain indispensable for the foreseeable future.

Consequently, if tech candidates (entry-level and seasoned pros alike)  are exploring other industries, how can real estate recruiters position their firms as the workplace for promoting careers?

To begin with, operators must move swiftly to headhunt and attract candidates most qualified for each technical role. Within this context, the traditional hiring process is too rigid and slow to respond to the dynamic demands of modern-day recruitment.

Instead, experts recommend a prompt approach where talent hunters are prepared to immediately reach out to candidates qualified for the advertised vacancies.

Also, real estate startups and medium-sized companies often cannot match the benefits and standards offered by larger corporations. To compensate for this gap, these modest-sized companies must sell the working experience and culture to candidates.

The prospects of a supportive, transformative work environment can convince them to trade stodgy cubicles for organic workspaces. A work culture predicated on equity, inclusion, and authenticity is vital for talent acquisition and retention in the tech sphere.

Finally, it is essential to gauge the candidate’s perspective, understanding, and technical skill sets from the outset. This will allow you to move faster and focus on other aspects not typically addressed during candidate interviews.

What to look for when interviewing applicants

The key qualities to look for when interviewing technical individuals are competence and culture fit. Competence evaluation starts with identifying the critical attributes for the role and ensuring the candidate’s responses, documentation, and references provide satisfactory validation of those skills and qualifications.

Assessing culture fit, on the other hand, is trickier. Nevertheless,  evaluating this factor is possible when we closely examine how the tech applicants’ values align with your firm’s core values. Lastly, it is important to look for indicators that you can build a relationship and rapport with the candidate.

How to approach and carry out the interview 

A structured interview process will resonate well with candidates and allow you to enlist the services of qualified technical talent. At this stage, the diligence and tone of your approach is crucial.

First of all, determine the most important qualifications and attributes candidates will require for the role. Once you have clearly defined the key selection criteria, review the submitted applications carefully and promptly prepare a shortlist of the most qualified candidates.

Still, before you proceed to the interviews, ensure there are no applicants with weak credentials that aren’t serious contenders for the position given the final pool. In any case, we advise you go into the interview with the appropriate attitude and foster a cordial, transparent atmosphere so the candidate is comfortable and can learn as much as possible about your company (and you them).

Emphasize at the outset that they should feel comfortable asking tough questions at any point in the interview process. Further, throughout the conversation, ask the candidate to voice their concerns about your firm so you can imply how essential transparency and open dialogue are in your company’s culture.

This interview structure will allow you to effectively determine if the candidate’s personality and workplace expectations align with your firm’s goals and priorities. To make such an assessment, you need to dive into your company’s core values, priorities, initiatives, and elaborate on the nature of the work environment you offer. Also, avoid exaggerations or ambiguity — applicants appreciate a realistic description of the work culture.

Pursuing this approach will fill the candidate with confidence about working at your firm and whether their creative and technical skills will be celebrated or reined in.

In our experience, ensuring potential employees have a crystallized perception of their responsibilities and the nature of the work environment will improve a company’s image among job seekers, including both those starting out and those with years of experience.

Tilting the odds in your favor

Tech talents are indispensable in today’s workplace but are in short supply, not to mention they represent a workforce attuned to flexibility and the remote work approach. In other words, successful recruiting requires that we pivot and pioneer in the development and application of interviewing and onboarding processes. 

Additionally, organizations in nearly every sectors need these professionals and are willing to accommodate their requirements and values. For CRE companies, especially startups, the perennial demand and competition for labor have made hiring technical individuals as competitive as ever.

That said, being proactive and prepared in terms of what to focus on, what to look for during the interview, and how to approach and carry out the interview can swing the balance in your favor and ensure you hire an adequate number of the most qualified technical individuals.

Key performance indicators, or KPIs, have long been the reigning standard among real estate companies to measure individual employees’ contributions to the organization’s growth. 

KPIs are intended to outline a company’s goals, their importance, who will be in charge of their implementation, and the timeframe for their execution. The challenge, however, is that most firms adopt almost identical KPIs even though their operations are markedly divergent. 

Increase assets under management by 100, close at least 50 deals, or acquire a minimum of 15 new Class C multifamily apartments are ubiquitous KPIs that appear impressive on presentations but do not translate into actionable steps. Unsurprisingly, although the indicators are clear, few results are actually achieved. 

These limitations of KPIs in the context of companies’ immediate and future targets demanded we explore an alternative metric for tracking deliverables and implementing phases of a project, especially within the commercial real estate sphere. Fortunately, the concept of objectives and key results (OKRs) was developed to facilitate goal setting and attainment.

In this article, we begin by discussing what OKRs in CRE are and how they improve your bottom line. Then, we propose steps for creating a set of OKRs that are aligned with your investment and entrepreneurial ambitions. 

The concept that works: What are OKRs in CRE?

OKRs are a metric system for establishing goals on a micro level for a team, department, or individual to communicate and evaluate success in more meaningful ways. 

The main difference between KPIs and OKRs is that the former are often standalone metrics that track how well an activity is being done, while the latter provides a framework to set and track activities that reflect the desired outcomes and key results that the company would like to achieve.  

For example, a commercial real estate firm may aspire to become the leading owner of Class A assets in Charlotte. A key performance indicator could be a 10% increase in cash flow year over year,  while the objective when setting an OKR in CRE could be to gain ownership of 10% of all Class A office buildings within a specific zip code. 

Crucial milestones would then be organized into: 

• Daily meetings with the acquisition team to review deals in the area.
• Increasing the numbers of letters of intent sent out each week. 
• Making an offer on every Class A office building to bring the firm closer to its objective. 

Overall, OKRs in CRE such as these offer a more tailored action plan than a generic KPI would. 

Invigorating the bottom line: OKRs boost outputs 

Firms can improve their brand, financial, and operational results with OKRs because the goals of this system are more aspirational and encourage creative plans to achieve them. 

This collaborative tool for goal-setting challenges teams in a commercial real estate firm to reach their big picture objectives but permits flexibility in the actions oriented toward their execution. Additionally, the simplicity and clarity of OKRs’ milestones keep the team focused and committed. 

More importantly, a company that embraces OKRs tends to charge individual personnel with their own OKRs and empower them to make efficient decisions and accomplish more. 

To illustrate, consider the story of Peer Street, a real estate platform that offers investments in debt. After the founders began implementing OKRs across their team of 25 people in February 2016, they attracted over $100 million in new investments within a few months and were awarded Innovator of the Year in Lending thereafter.

Everything considered, as the owner or operator of a commercial real estate firm, adopting OKRs provides a cohesive direction for your team and supports a positive impact on your bottom line. 

How to set the right OKRs in CRE 

It is crucial that you adopt these best practices to enhance the efficiency of your OKRs: 

Calibrate short-term objective to match overall vision

Align your objectives with the company’s greater vision. The objectives must match your overarching business goals to motivate employees and deliver results that more efficiently advance, or at least unify, the firm’s position in the market.

Ignore OKR overload or insufficiency 

Avoid setting too many OKRs. A disproportionate number of simultaneous objectives often overwhelm the team, undermining morale and lowering performance. At the same time, too few OKRs can delay the timeframes for accomplishing goals. For optimal OKRs, experts recommend a maximum of five concurrent OKRs.

Contain procrastination and soft-pedaling

Maintain awareness of OKRs. It is the usual practice for managers to set OKRs only to leave them unattended until close to the deadlines. To mitigate this, draft and share regular reminders of the objectives and desired results in your company’s public space — perhaps the old-fashion notice board or online project management platform. Make them an essential agenda in your weekly meetings. The greater the focus management places on OKRs, the greater priority teams assign them. 

Streamline the metric

Simplify OKRs and resist the urge to condense them into glorified task lists. While important milestones in OKRs need to be specific, they must still allow a certain level of flexibility in how they are reached. 

Synergizing the criteria: Accountability and clarity beget results 

Ultimately, clarity and accountability often breed quality results. And results guarantee success. A commercial real estate firm that incubates a system of metrics that fosters tangible actions will better position itself to achieve its goals, whether raising capital, acquiring new assets, or expanding its footprint within the community and industry. Moving forward, consider what OKRs you could adopt that have the potential to transform your company’s fortunes.

 

Is the Digitalization of Commercial Real Estate a Blessing or a Curse?

Though CRE tech is gaining ground in adoption, there are still questions and concerns regarding its value and cost.

The ongoing digitalization of every aspect of how we do business today is met with either glee or disdain, depending on how owner-operators perceive the benefits and drawbacks of the transition.

Some of the concerns include high implementation cost, increased complexity of operations, additional staffing requirements, and an extended learning curve. Despite these — and many other — very practical apprehensions, the juggernaut that is digitalization is not slowing down. 

On the contrary, its influence is growing markedly in several fields, especially ours.

Let’s look at four areas in commercial real estate where digitalization is having a major impact and how the trend benefits — or detracts from — your NOI and growth.

1. Digitalization of data

Data is the big thing right now in CRE, and sensibly so. 

Data drives our decision-making and enables us to assess and monitor our performance, evaluate acquisitions, and forecast future outcomes — including upside at exit — more accurately.

I think few would object to the value in digitizing our finances, and likely fewer are laggards. For budgeting, auditing, and providing transparency to our investors and other stakeholders, going digital is a necessity and expectation that is practically standardized in the 2020s.

Furthermore, analog mediums (i.e., paper) are prone to loss, damage, and errors. And the inherent material waste and environmental damage that result from mass paper usage for leases and other vital documents provide no sustainable benefit. 

In contrast, the conversion to digital documents reduces materials costs and waste, and significantly streamlines how we search for, index, and prepare reports. In other words, digitalization turns raw data and information into relevant knowledge — i.e., actionable intel. 

Leases are a prime example where documents across an entire portfolio can be scanned using OCR (optical character recognition) and machine learning. 

The process transforms that bulk of paper and raw data into a wealth of information to power decision-making in the form of instant reports, such as portfolio-wide rent rolls and on property/tenant performance.

Fortunately, in the long term all the above strategies reduce operational expense, minimize internal staffing requirements, and improve strategic and financial performance.

2. Digital communication, management, and thought leadership

Our understanding of, ability to attract, and relationships with investors and tenants are the underpinnings of a successful commercial real estate enterprise.

The digitization of media, marketing, and communications channels has made it easier to target, connect with, and influence prospective and current stakeholders.

And not only is digitization more efficient from an operational point of view, it’s also much more cost-effective and generates increasing ROI compared to traditional paid media (print, broadcast, direct mail, and the likes).

The engagement we’re able to achieve with our prospects through social media grants us deeper insight into the needs and concerns of our target market. 

With that insight, we’re further equipped to create thought leadership content and engage with industry media in a way that speaks directly to stakeholder needs, builds rapport, conveys credibility, and creates opportunity.

Once we’ve formed those relationships, tenant and investor portals keep the lines of communication open, fostering an excellent experience for our stakeholders.

These tools also dramatically simplify administrative tasks, including customer service, rent collection, maintenance management, and reporting.

3. Digital design and building systems

On the design and development side, technology offers clear operational and financial incentives.

The work that would once have taken a vast team of architects, engineers, drafters, and consultants can now be completed in much less time by a more compact team, with reduced expense and fewer errors.

Additionally, with the aid of CAD, BIM (Building Information Modeling), and AR/VR, we’re able to accurately project — and experience — what the space will look like and how much it’ll cost to construct and operate.  

The digital tools also allow us to better understand the thermal performance of our builds and discover paths to reduce material requirements. 

Once the project has been completed, we can also leverage tech integrated into HVAC, lighting, water, and other systems to monitor and optimize usage — while also providing a healthy, comfortable, productive experience for our users.

Harness the digital transformation

Over the long term, all these aspects of digitization add up to increasing NOI and ROI and the simplification of operations.

With the guidance of experts in the CRE tech space, you can harness the digital transformation to support the growth of your portfolio and enterprise.

While there’s a cost in terms of time and expense to implement new systems, the learning curve is short and the advisement available. 

So, despite the pains in transitioning to the digital domain, the operational and strategic benefits are a boon.

Preventing the Accelerated Obsolescence of Your CRE Enterprise and Assets

Change is inevitable.

Yet, it drives value when we see where the path is headed and then adapt to position our firms at the forefront of the wave.

When we don’t, we’re faced with accelerated obsolescence. 

That is, if we’re not continually redefining our brands, properties, operations, and enterprises, they will decline in value more rapidly than they would otherwise.

So, how do we face change head-on?

By adopting new technologies and methods that allow us to continue providing the greatest value to our investors, users, and all our stakeholders.

Let’s look at several principal strategies required to put the brakes on obsolescence.

Stakeholders push us to evolve

Obsolescence is probably self-explanatory to an owner or operator of commercial real estate, but it’s worth revisiting what it is. It’s an unavoidable consequence of three phenomena: shifting technology, developing more efficient business models, and changing consumer tastes and expectations.

To illustrate, consider the expectations of perhaps our two most important stakeholders: investors and users. 

Investors insist that we reliably produce positive and increasing NOI and ROI, while our users want the most modern spaces, digital communication and management platforms, and energy-efficient designs and systems.

To keep our revenues up and tenants happy, we need to satisfy and exceed their expectations. If we don’t, obsolescence will gradually creep in over the years until we’re faced with the sudden realization that we’re losing value and being surpassed by forward-thinking competitors.

Environmental, social, and governance (ESG): business meets humanity

ESG is taking the spotlight in the 2020s.

More investors and users are demanding that we operate in ways that conscientiously preserve our natural environment.

Further, both groups expect that we do business in a manner that not only supports the bottom line but also has a positive impact on the community (local, regional, or global).

Incidentally, when we work to better our environment and the community, we generate public goodwill and reduce our carbon footprint — as well as energy, water, and materials expenses.

And for our investors and partners it’s become even more crucial, in light of recent recessions, that our operations are most transparent and ethical.

A commitment to ESG principles guides us toward practices that inherently maintain the value of our properties, fosters stakeholders’ trust, and grows our enterprises and brands.

Tech adoption

If you’ve been following my blog or social feed for some time, you’ll know my position on incorporating tech into your operations and offerings.

Adopting the latest (though most credible and proven) tech is essential to securing the best deals and executing your projects — from acquisition and renovations to property management and exit — most efficiently.

These days, there isn’t a facet of operations that hasn’t been infiltrated (i.e., optimized) by advancements in tech. 

There are numerous platforms, ours included, that facilitate due diligence, reporting/auditing, building design, finance and tenant management, and everything else we do to deliver that value-add for our investors and users.

Leveraging tech not only lets us deliver greater monetary value, but it also allows us to render a better experience for our stakeholders.

All things being equal, our partners (investors and tenants) will opt to work with sponsors that are simple to communicate with, and that make it easy for partners to understand how we’re generating value — tech enhances that capability ten-fold.

When our stakeholders don’t see nor experience our value, we’re slipping into obsolescence.

Smart design and improvements

This might be a more pragmatic consideration, and one we’re all fairly familiar with, but it’s directly correlated with the two prior strategies: ESG and tech adoption.

Our tenants aren’t just looking for a space to live or do business in; they’re also looking for that experience, and they want it to come at a cost (leasing and operating) that’s better or comparable to your competitors’.

How can we consistently meet this ever-present expectation?

The solution is obvious: keeping our properties up to date and ensuring that they’re relatively inexpensive to build, operate, and utilize. 

This strategy is vital for both new builds and existing properties. 

When we’re in the midst of the integrative design process, we can utilize building information modeling (BIM) to ensure that our finished product will function efficiently — before we break ground.

And before we empty our coffers on renovations, we can anticipate the expense and ROI of each type of improvement to ensure that we’re investing our dollars where they’ll give us back more than we put in.

Getting proactive

A proactive approach is the best medicine to cure accelerated obsolescence.

While there is an expense involved in implementing new tech, adopting ESG, and keeping our properties on the cutting edge, the payback in terms of the goodwill and loyalty of our stakeholders yields immeasurable dividends. 

The predictable ROI made possible by tech counters obsolescence and enhances the value of our enterprises and assets.

 

The 5 Building Blocks of the Next Big CRE Firm 

If you’ve clicked on this article, it likely means you want to know what it takes to be the next sensation in commercial real estate development and management.

Taking your firm to the next level is about strategy and cumulative effects — not a genius fix in any one area.

To effectively grow our businesses, we need an integrative approach that leverages our team’s aggregate skills to create a synergy of functional areas that strengthens our brand, value proposition, and decision-making capability. 

The results are improved project outcomes, greater access to capital, and more opportunity. 

Naturally, a future that promises these effects is too good to pass up. So, let’s look at five areas that work together to help you scale.

1. Sufficient capital

Not much can happen without sufficient funding.

It is the centerpiece of a successful CRE operation and requires a concerted team effort and strategic planning to fill and maintain the capital pipeline. 

So essential is raising funds that it’s both the direct and indirect objective of all our dealings. The following factors we’ll discuss are all intrinsically tied to and support generating capital.

1a. Demonstrating strong performance

To prove that we know what we’re doing, we need to show that we can deliver results. That said, how do we prove we possess that expertise and the potential to come through, rain or shine?

A principal point here is, we must leverage data to build a strong case for investment in our enterprise.

While other factors are important, as we’ll see, at the end of the day investors want quantitative, empirical evidence that we can generate a stable and satisfactory ROI.

To efficiently and consistently accomplish this, we need systems that monitor and collect data — across our enterprise — for acquisitions, revenues, operating costs, and more.

With centralized and organized data, we can quickly generate reports to incorporate into our pitch decks. And with those insights, we can make better decisions, which will further demonstrate our capability and expand our portfolios.

1b. Data-driven decision-making 

Business, like life, is a series of decisions.

Although we’re all prone to a few errors and hiccups along the learning curve, a conscious effort to leverage data and think critically enables us to consistently improve the quality of our decisions.

Fortunately, data is abundant, and with the right technological tools — and human insight — we can make choices that yield a net positive effect on the value of our businesses.

We’ve mentioned ‘data’ a few times up to this point — and we’ll do so a handful of times more — for good reason. 

Investors respect data-driven decision-making and the informed projections we’re able to offer based on evidence rather than conjecture or intuition.

Though there is something to be said for experience and gut feeling, in the high-stakes field of commercial real estate, we have to balance intuition with the scientific method.

1c. A strong brand and marketing

Data is crucial, but it’s not enough to differentiate from our successful competitors — and there are many vying for our investors’ capital.

Inspiring faith in our brand is the other side of the data coin to make a unified differentiator. Trust emerges from a combination of proof and an alignment of values and personalities.

Consequently, we need to build a marketing system and web presence to tell our story and share our values. An effective value-expression strategy incorporates a compelling website, social media, thought leadership, and public relations.

Aside from the pragmatic need to generate leads, we use effective marketing to position our brands and executives as credible experts in the field and to illustrate what drives us and how we act with integrity. 

Through this process of engaging with our target market, we gain a better understanding of our prospects and use that insight to refine our value propositions and messages.

The outcome is an alignment of values and expectations with investors and other stakeholders, which allows us to attract capital and talent — and take our firms to the top.

1d. An excellent management team, staff, and strategic partners

We saved the best — and most crucial — for last.

Your team, including yourself, is your most important asset. The people behind your organization are where your brand’s true value lies. There is no data collection or interpretation without the keen minds to plan, organize, implement, and monitor these measures. 

Additionally, trust is built not only on fact but also on a sense of rapport. In your pitches to investors and other partners, highlight the experience and personality of the members of your team.

Then, demonstrate how the unique capabilities and track record of each team member coalesce and resonate to create synergistic value that is greater than the sum of its parts.

Skip the growing pains

Rather than struggle through the growing pains, leverage the advice in this article to accelerate your growth. Rapid scaling starts with building your capital resources, showing your performance by the numbers, establishing a core competency in strategic, data-based decision-making, and conveying the value and personality of your team to forge trust.

To keep our NOI at its peak, or get it there, we need to understand tenant behavior — how our tenants think and act when leasing space for their business or residence.

Being aware of their expectations and concerns helps us design our offerings to ensure satisfaction and to keep our properties fully leased with high-quality tenants. 

Some occupant needs and desires are perennial, whereas others have very much to do with the pandemic and its ongoing economic, social, and health consequences.

Here, we dive into understanding tenant behavior and look at how to address health concerns, deal with economic risks, and position your brand and properties to meet tenants’ needs.

Marketing your properties and brand

If your prospective tenants don’t know about your properties, or believe in your brand, you’re going to have a tough time filling your units.

In the 2020s, marketing and branding are crucial, more than ever, to cut through the noise, get eyes on your offerings, and establish credibility.

Your properties need to be in locations that align — in image and function — with your tenants’ values, tastes, and environmental/economic needs (i.e., sustainability).

As for the image part (that is, your brand position), most of that is expressed and absorbed in the online realm. Your web presence and tenant management platform are where users learn more about you, what you stand for, and how you interact with (in other words, treat) them.

For function, users need spaces that are modern (or at least up to date) and efficient, with high-quality, tech-enabled fixtures, furnishing, and equipment (FF&Es). 

In the area of sustainable design and operations, both function and image are positively positioned by their adoption. 

Sustainable design and operations strategies provide health benefits — clean air, natural views, and thermal comfort — that bolster productivity and mitigate the legal risks associated with sick building syndrome (SBS).

Admirably, tenants, as do most consumers today, expect the firms they enter business relationships with to be environmentally and socially conscious in all aspects of their operations. 

And on a pragmatic level, tenants want spaces that go easy on electricity and water.

Economic risk — caution in leasing 

Committing to a new or renewed lease is a hard choice for tenants in the current economic climate.

Market instability in the COVID aftermath, falling lease rates in some asset classes, and soon-to-rise interest rates are compelling users to negotiate for terms that protect their interests from economic risk.

When it comes to tenant behavior, tenants are demanding shorter, more flexible lease terms that will reduce their loss — or position them favorably — should lease rates or interest rates shift during the term, or if the tenant must break the lease for unforeseen external reasons.

The change from LIBOR to SOFR also lends some uncertainty in leasing and creates additional concerns that must be addressed contractually. 

Plus, the pandemic brought into focus the importance of the force majeure clause and the need for language that specifically describes the circumstances under which tenants can be relieved of their obligations.

For the owner-operator, the best advice is to address these concerns upfront. Proactively direct your legal department to prepare new lease agreements that offer fair terms that benefit both parties.

Coronavirus safety concerns

The threat of infection is yet another mounting influence on how tenants select and utilize their spaces, with the intent to protect their staff and transient users (clients, visitors, vendors, etc.) taking priority.

During the height of the pandemic, landlords and prospective tenants found new ways of showing properties, using AR/VR tech and video conferencing to conduct walkthroughs and guided tours. 

Accelerated by the circumstances, the adoption of digital documents and e-signing have rendered paper and pen obsolete, further enabling the leasing process to proceed without close personal contact.

Also, the need for social distancing and sanitary conditions are intensifying the demand and expectation for touch-free building systems, antimicrobial surfaces, and proper ventilation. 

Further, the emergence of part in-office, part work-from-home business models is amplifying the need for open, flexible space for focus and collaborative work.

To learn how to adapt and provide greater value, discuss these concerns with your current and potential tenants to better understand their needs.

Care fosters loyalty

Taking marketing, economic, and safety considerations into mind, you can develop your portfolio and leasing strategy to match the expectations and needs of your tenants.

When your tenants are secure in their contractual and economic positions, experience minimal operational costs, and have a space that meets their wellness and collaborative requirements, you’ll have an optimal occupancy rate and the lowest turnover. 

Commercial real estate debt typically comes with certain conditions or ‘loan covenants.’ These covenants vary widely depending on the lender and their preferences. However, most require borrowers to maintain a debt service coverage ratio (DSCR) of at least 1.15x to 1.25x. 

DSCR measures a property’s ability to fulfill its debt obligations from its cash flow. And should the debt exceed the income — in other words, the DSCR falls below an agreed-upon standard — lenders have the authority to seize a property. 

Even worse, they can demand the loan be paid in full immediately and without notice. As a result, commercial real estate owners are strongly motivated to anticipate and recognize financial trouble and know how to avoid it. 

Fortunately, there’s a way to forecast and minimize this real, though harrowing, possibility. Stress tests play a vital role in steering owners and operators away from potential ruin.   

What is a stress test? 

Stress tests are used in finance to determine how well assets and liabilities can withstand negative changes in the market. In real estate, stress-testing reveals how well a portfolio holds up when different variables that underpin its profitability are altered. 

While the name may imply a physical component in many industries, stress tests in CRE largely take place in digital forms, such as Excel spreadsheets or sophisticated data modeling software.  

This technique involves manipulating financial data of a property to simulate different hypothetical scenarios and noting the effects on net operating income (NOI). The computed results are then summarized in a decipherable format to inform decision-makers on potential outcomes if a critical assumption in a model is negatively impacted. 

What variables are tested? 

Although a variety of variables are introduced in a commercial real estate stress test, the following are the most commonly used to gauge the resulting impact on the DSCR of a real estate portfolio. 

Interest Rates 

A subsection of commercial real estate loans set the DSCR based on an interest rate, whether it is the interest rate of the loan or a rate tied to Treasury Bonds. 

In this instance, it is important to measure the theoretical effect of fluctuations in interest rates. Usually, the base interest rate of each property loan is increased across the board by 1 to 3 percentage points to simulate mild, moderate, and severe jumps in the cost of interest. 

If a rate jump sends a property into the negative, it’s a clear sign that the property is highly susceptible to interest rate increases and therefore must be monitored by the owner or operator closely. 

Vacancy Rates

For the remaining subsection of commercial real estate loans, DSCR is calculated by dividing the NOI of a property by the monthly loan payments. 

Vacancy rate affects NOI, and that relationship implies that a vacant portion of a property cannot generate revenue to pay the debt service and operational expenses. Even if a property is 100% occupied, financial models will factor in the cost of vacancy as a line item in the operating budget, usually at a rate of 5-7% of the rent amount. 

But during a commercial real estate stress test, these vacancy rates are increased to double or even triple the base amount. Extreme stress tests may even set them to 100% to see what would happen to the DSCR if all tenants of a property were to break their leases. 

What’s the point? 

Stress-testing vacancy rates gives operators an idea of just how high vacancy rates can climb before expenditures surpass revenues. If they know the property will be cash negative at a 60% vacancy rate, they can reconsider their marketing approach to improve occupancy. 

Rental Rates 

Lease rates are the last major variable in a commercial real estate stress test. It’s a crucial metric because the amount of rent received contributes directly to the income generated. 

Rental income underscores the ability of a property to meet its debt obligations. Therefore, by determining the rental rate at which a project would be cash negative, an operator has a specific marker to track and prevent future adverse consequences. 

For example, if a stress test reveals rental rates below $3 per square foot would lead to financial losses, commercial real estate owners and operators can encourage their brokers to push for rates that exceed this threshold. Owners may also improve business operations and decisions to ensure they stimulate sufficient demand to secure optimal lease rates.

Stress test requirements

Stress tests cannot be done in isolation and require a certain amount of information about the property or portfolio. In fact, the more property and portfolio data an owner or operator collects for this purpose, the more accurate a commercial real estate stress test will be. 

Thus, in preparation for a stress test, it’s best to have all past financial statements, pro formas, and the following details: 

• The type of commercial loan. 
• The loan amount. 
• The net operating income. 
• The appraised value.
• The date of appraisal.
• The capitalization rate. 
• The original loan to value.
• The interest rate spread.
• The basis of rate index.
• The current interest rate.
• The current loan balance. 
• The principal and interest payment amounts. 
• The minimum debt-service coverage ratio requirements. 

Owners and operators who gather this extensive set of data points and incorporate them into their stress tests typically generate the best insights. 

When in doubt, find out 

Success in commercial real estate depends on the interaction and intersection of a number of factors, including rental income, interest rates, and key market conditions. Stress-testing provides commercial real estate owners the unique opportunity to understand and anticipate what contingencies could expose their portfolios. 

Short of being a crystal ball, stress tests provide valuable foresight that operators can leverage to optimize their methods and steer clear of crushing losses. That is, they are the best tool for commercial real estate owners and operators to manage risk and be proactive in building financial legacies. 

 

Loss of business income became an all too common occurrence at the outset of the COVID-19 pandemic. 

Internationally, businesses were forced to shut down to check the transmission of the SARS-CoV-2. Even worse, the business income (BI) coverage they had purchased to mitigate the losses…covered nothing. 

This unfortunate exposure occurred because there were (and still are) few insurance companies extending BI coverage for loss of revenue during a pandemic. “You’re on your own” was the implied message when policyholders demanded financial sheltering.

But commercial real estate owners and operators concerned about being caught in limbo in another pandemic have recourse besides insurance companies. This article delves into the three primary practices that can flexibly cover financial losses. 

Savings

The most viable option to insure against the loss of business income is savings. 

Setting aside a certain percentage of commercial real estate income has rescued many owners and operators who were hit with unexpected financial woes. 

The greatest benefits of using your own savings to offset the loss of business income are flexibility and immunity from red tape. Substantial savings eliminate the dependence on an insurance company — especially their schedule or interpretation of what is covered or otherwise — or haggling with a third-party processor in order to receive crucial resources. That is, such funds can be pulled on demand. 

The only drawback of using savings is the length of time required to accumulate funds sufficient to alleviate a medium- or long-term loss of revenue. 

Increased Security Deposits 

Increased security deposits have also emerged as a practical strategy to insure against loss of business income from non-paying tenants. 

Prior to the COVID-19 outbreak, credit grade was inversely proportional to security deposit requested — so, on average, the higher the credit grade of a commercial tenant, the lower the security deposit threshold a landlord would set. 

Yet when the pandemic unfolded and forced even AAA tenants to default on their rents, this implicit industry standard no longer seemed applicable. Now, commercial real estate owners and operators are implementing stricter security deposit standards that require large cash commitments. 

The rationale behind this latest condition is, should a tenant or business default, there will be more money available for landlords to recoup. That said, states or local jurisdictions may restrict landlords’ autonomy in this regard and cap security deposits. Therefore, it’s best to check with a legal representative before you set the fee. 

Rent Guarantee Insurance 

Rent guarantee insurance had largely been popular among residential real estate landlords even before the first reported case of COVID-19 infection. Unfortunately, their CRE counterparts had limited access to this insurance product pre-COVID-19.

However, in the wake of the pandemic, several companies have introduced options for commercial real estate owners and operators to receive similar protection — to which the intended consumers have responded with enthusiasm.

CRE landlords have widely adopted rent guarantee insurance because of the absence of a ‘physical damage’ requirement in order to approve a claim. This stipulation was the basis for most insurance companies’ decision to limit business income coverage during the pandemic. 

Fortunately, rent guarantee insurance can remedy this imbalance and cover the landlord if a tenant misses a payment — either successively or intermittently. Additionally, the landlord can add the cost of this insurance to rent so the tenants bear the expense instead. 

The only potential downside to rent guarantee insurance is the narrow scope of coverage. As this is a newer product in the U.S., companies are offering to insure loss of rent for just six weeks to six months. 

Nonetheless, this increasingly popular policy can provide a concrete buffer against loss of business income. 

Shift the Burden, Ease the Woes 

COVID-19 has shown business owners that there are certain events and contingencies that insurance won’t cover, such as the loss of business and rental income due to government-mandated shutdowns. 

To prevent future gaps in coverage, commercial real estate owners and operators must be prepared to shift the burden of protection back to the other parties involved, specifically the tenant and the landlord. 

Fortunately, there are a few mitigation tactics to de-escalate the impact of gaps in coverage and increase your chances of compensation. Saving aggressively, raising security deposit requirements, and purchasing rent guarantee insurance coverage are proven ways you can offset potential losses. 

Still, only time will tell which approach will be the most effective: BI or DIY. 

“Never invest in a business you don’t understand.” — Warren Buffett.

Gathering sufficient knowledge before each investment decision is crucial in efficiently building your portfolio, optimizing performance, and managing exposure.

The importance of these choices is highlighted when commercial real estate investors consider allocating capital in private funds. These real estate pooled funds fall into two categories: open-end and closed-end funds.

Closed-end funds have a fixed pool of assets and predetermined end date, along with a defined return target. Generally, no capital is added or withdrawn. In practice, most of the real estate funds are closed-ended. To exit, investors must sell their units to another investor seeking to take a position. In other words, closed-end funds offer close to no liquidity. 

In contrast, open-end funds have constantly fluctuating portfolios since investors can enter and exit at any time during the fund’s existence. No termination date is set. Therefore, underlying assets constantly evolve following outflows and inflows of capital. 

In this article, we will discuss the characteristics of and main differences between open-end and closed-end real estate funds, and how these investment models can support your unique financial objectives.

Closed-end funds: Profile, strengths, and limitations

A closed-end real estate fund is an investment fund with units and term predetermined. Investment in this fund is limited to the capital to be raised initially, and only open during a defined subscription period. 

Upon the manager’s receipt of commitments, the fund is closed and new investors cannot be added. Most closed-end funds are either listed as REITs (Real Estate Investment Trust) or unlisted but reserved for institutional investors.

What are the exit strategies for a closed-end real estate fund?

To recover capital in a closed-end real estate fund, you will either have to sell your participations to a willing buyer (‘over-the-counter’) or wait until the fund’s assets are liquidated. 

Both scenarios highlight closed-end funds’ lack of liquidity. Also, closed-end real estate funds usually have lock-up terms of 10 to 20 years.

What about the returns?

Return strategy in closed-end real estate funds primarily involves the appreciation of the underlying assets and their sale at term by optimizing them — such as construction, renovation, cost, and management structure — rather than focusing on the units’ income streams.

Therefore, returns in a closed-end real estate fund are predictable: The strategy of the fund is driven by executing a core business plan, with the expectations of profitability well known to its investors.

Open-end funds: Profile, strengths, and limitations

With no termination date, an open-end fund continually accepts subscriptions while adjusting its strategy and asset allocation. When there is a net inflow of new money, the fund manager invests it in additional underlying assets. 

In case of an outflow, the fund’s portfolio is rebalanced. That said, few real estate investment funds are open-end.

What are the exit strategies for an open-end real estate fund?

Real estate funds with an open-end structure allow investors to enter and exit without restrictions. Fund managers may, however, impose an initial lock-up period so that the base assets can be allocated to the fund without disruption.

Afterward, investors who wish to exit may sell their units to the manager, who has the underlying investments to fund their redemptions. In summary, open-ended structures offer greater flexibility and liquidity.

What about the returns?

Income strategy comes mostly from the fund’s underlying unit cash flows. Managers seek assets with steady, recurring income over time. 

Due to their focus on capital appreciation rather than development, open-ended real estate funds are considered to offer relatively lower total returns while carrying a lower level of risk.

Performance during market downturns: Open-end or closed-end?

Effect on open-end real estate funds

Open-end funds can suffer from a panic effect driven by the economic context where investors are eager to exit quickly. Consequently, the most liquid assets are sold to finance redemptions, often at a lower market price. 

These circumstances can trigger severe losses and imbalances in the fund’s portfolio, leaving the remaining investors in a difficult position.

Effect on closed-end real estate funds

Closed-end funds are relatively immune to this problem. Investors who wish to exit will have to find buyers in a very limited secondary market. Fund managers, on the other hand, are not required to sell the underlying assets. As a result, investors willing to hold their position will not be affected by a ‘panic selling’ effect.

In general, closed-end funds have shown excellent performance during economic recovery periods.

Keep your investment objectives in mind

Both open-end and closed-end real estate funds present pros and cons. Open-end funds provide greater flexibility and liquidity, thus minimizing risk. Consequently, returns are overall lower. 

Closed-end funds, in comparison, require lock-up terms acceptance and hence no liquidity, allowing their managers to focus on maximizing the fund’s objectives and performance. And in a stressed economic climate, the balance of the portfolio is protected from the risk of a forced sale. 

In practice, your choice will also be highly affected by the nature of the underlying units and the manager’s allocation strategy, subject to current market conditions. 

Regardless of the fund’s type, remember to conduct thorough due diligence on its manager prior to making any investment decision. It will allow you to assess the fund’s capabilities and forecast its performance. 

Ultimately, your choice should reflect your objectives, after taking all factors into account, including risk tolerance, time frame, liquidity, and tax considerations.