Leveraging Tech to Assess and Manage Risk in Commercial Real Estate
For most commercial real estate investors, 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. Then, you’ll be in an excellent position to make strategic decisions that reduce your exposure and lead to the top.