The post-pandemic world could be volatile, but there are some steps investors can take to minimize their risk
COVID-19 has created an unpredictable economic environment. And even though we’re moving toward strong economic growth and the possible end of the pandemic, at least in the United States, some uncertainty remains.
First, we don’t know for sure if we’ll reach herd immunity. In theory, we’d need to vaccinate 70-80% of the population to durably stop the virus’s spread. However, issues like vaccine hesitancy and its delayed approval for children make reaching those numbers challenging.
There are also new, more transmissible variants circulating that could delay herd immunity goals. While vaccines still provide protection from these variants, we may need to vaccinate an even more significant percentage of the population to check the virus.
As a result, there are no guarantees that we’ll return to “normal,” and the pandemic could bring permanent changes to the way people shop and how businesses use commercial real estate.
Here’s a look at three ways CRE investors can navigate these uncertain times and give themselves the financial agility required to adjust.
1) Watch the trends
Today’s commercial real estate investors will want to keep an eye on how CRE spaces are trending. For example, the rise of online shopping has led to persistent demand for distribution and fulfillment centers. Likewise, there’s increased demand for multi-family housing, suburban office space, and life science labs for pharmaceuticals. Businesses are looking for more flexible office spaces, too, so they can adapt to employees working from home part-time while still having space available for them when they head to the office.
Will these trends hold, or are they short-term reactions to living through a pandemic? Evaluating trends while conducting thorough due diligence on a specific opportunity can put an investor in a better long-term position.
2) Fill spaces smartly
Naturally, property owners would love to have long-term tenants in every investment property, but it might not be realistic for specific spaces. The days of 10–15-year office leases paused during the height of the pandemic, for example, and many tenants are still looking for short-term agreements to provide the flexibility for possible growth or downsizing.
The most important element of property management remains filling empty spaces, which is especially important in mixed-use buildings. A blend of tenants with varying services can make the property more appealing to prospective tenants. This mix is specifically crucial for strip malls but extends to mixed-use spaces involving residences or offices, where those tenants will be attracted to different commercial goods and services. Some CRE investors are even providing significant price breaks to startups to increase a complex’s visibility, potentially attracting additional tenants.
Otherwise, every project must account for any pause in demand for long-term leases. Office projects that require significant, customized revisions of the space, for example, do not make sense for investors or lenders when the lease terms don’t provide a clear ROI for improvements.
3) Build and maintain relationships
If you do your research and determine that now is the time to expand your CRE portfolio, you’ll need capital, of course. But since we remain in an uncertain period, banks are still taking a conservative approach to lending.
The gist is that many lenders are relying exclusively on borrowers with whom they already have a relationship. Many are also seeking 5-10% in additional equity before approving a loan, along with a well-researched business plan and projections. Ideally, you’ll already have a solid relationship with a lender, making it more likely you can secure the necessary financing.
Now is also the time to begin building these relationships. And the best way to secure a loan via a new lender is the same as it’s always been: present a solid plan for the project that includes realistic revenue projections and is ideally backed by tenants with favorable lease terms. It’s also essential to evaluate your current debt-service coverage ratio to ensure it is within a lender’s desired parameters.
Most loans are proceeding on a case-by-case basis, making it essential to conduct adequate due diligence and have this information ready to present to potential lenders.
Gathering information
Some aspects of CRE investment may remain volatile for months, if not years, because so many industries are in a state of flux. Some sectors will recover and thrive, while others could undergo long-term changes and never return to pre-pandemic norms.
It’s essential to evaluate where various industries are headed while always keeping an eye on the ball: investments should have real value after in-depth due diligence, regardless of trends or rosy projections.
Morris Southeast Group is available to discuss your CRE portfolio and help you make the right moves in this investment environment. Give us a call at 954.474.1776 to speak with an expert today. Ken Morris is also available directly at 954.240.4400 or kenmorris@morrissegroup.com.
