Lessons from previous crises will help owners survive the current market upheaval, according to Patrick Toomey of Institutional Property Advisors.
The impact of the COVID-19 pandemic and the resultant economic and societal fallout has been far-reaching and is unique when it comes to the “why” of the crisis—at least in our lifetime. Being a longtime CRE industry veteran, however, I believe this downturn has similarities to others.
The most previous meltdown, as we know, was the Great Financial Crisis. Within a few years of 2008, the market “thawed” and it was pretty uneventful, though lenders seemed to have more disciplined underwriting standards. Since then, the markets continued to move upward, with the only blips being interest rate fluctuations that impacted cap rates. Otherwise, it was more or less, business as usual until COVID-19.
This year, the world again came to a standstill similar to 9/11 and the crash of 2008. Unlike past crises, however, this event is anticipated to reshape much of “reality” that we were previously accustomed to, especially when it comes to real estate—in particular, indoor occupancy levels and overall use of space.
The multitenant and single-tenant retail CRE sector will experience disruption, but creative and agile owners have the opportunity to come out even stronger than before.
In reflecting on the various disruptions I’ve lived through, the common themes I see from a CRE standpoint are:
- Recovery happens eventually.
- Savvy investors learn from the experience.
- Opportunistic buyers get off the sidelines and acquire assets at a discount.
- Strategic real estate investors work to reposition their asset in some way.
- Good real estate appreciates over the long term.
The best real estate owners offer good tenant relations, make smart leasing decisions, and stay on top of their asset with regular site visits, watching collections, and keeping a strategic tenant mix versus signing the first one that comes around. It also involves vetting tenants’ financials.
Back to Basics
Smart leasing decisions means maintaining the highest sustainable rent levels versus taking lower rents in lieu of tenant improvement allowances, and striving to garner tenant sales reports. Tenant financials are crucial to properly identifying a property’s underpinning value, and tenant sales numbers help owners in a huge way when working to refinance or sell an asset. I’m always surprised at how few owners require transparency with tenant sales.
Watching collections is important, but more important is having a partnership relationship with tenants. I am always impressed with the Krausz Cos. and how the philosophy of the founder has infused a culture of partnership with its tenants and it has been very successful in its investments as a result. Newmark Merrill is another company that I have always admired, as it is fueled by Sandy Sigal’s incessant demand for excellence and information.
On a larger scale, I’ve always been impressed with Blackstone. As large as they are, they take a very granular approach to real estate. Despite billions under management, they know every detail of every asset and this “focus on the details” approach is at every level of the company in my observation. It’s truly remarkable. These companies, as well as many others that maintain a culture of discipline of fiduciary over their assets, consistently withstand down market cycles.
To conclude, a strong focus on the fundamentals of real estate leads to long-term value creation and preservation. I’ve seen it with small and large companies alike. This is because retail real estate is not a commodity, and every retail center is a market unto itself. A shopping center’s anchor and surrounding shops is an economic microcosm that, if managed properly and strategically, will add value over time. Ultimately, investors that understand these fundamentals have high-performing real estate portfolios.
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