Why Real Estate Investors & Owners Must Prune Some Properties While Focused on Portfolio Growth?

Why Real Estate Investors & Owners Must Prune Some Properties While Focused on Portfolio Growth?

Designing and creating a successful real estate business, especially in the commercial real estate industry, takes discipline, commitment, focus, and creativity. You’ll need to exercise high levels of thinking and performance while engaging collaboratively with your team.

After a few years in business, you’ll want to sell the property while growing and scaling your company to the next level. You’ll need to evaluate your current business before deciding how you want to grow. The following six factors will then help identify the problems and opportunities of selling real estate while strategically moving towards sustainable growth.

1. Charting the path toward value and growth

Real estate is complex, counterintuitive, and emotional. A variety of choices, jargon, and necessary tasks can lead to confusion while masking issues. Believing prime retail space will result in the highest payout is faulty logic. And discussing relocations with managers and coworkers can lead to heated and emotional responses as they grapple with change.

Here are three steps you can use to help chart your company’s path towards selling:

  1. Focus on financial matters. Link real estate to revenues, expenses, asset values, and market values. These impact the investors’ view of the company.
  2. Relate real estate to productivity. Consider repositioning sales centers closer to customers or shedding high-image headquarters in favor of more functional facilities. By implementing these measures, you’re increasing the value of sales and production units per square foot, thus relating the real estate to productivity.
  3. Reveal excess capacity. Show how to improve real estate performance through square footage. For example, review square footage per person, number of shifts or hours in operation, or number of locations. Use operational measures and computer models to visualize links between the company’s current situation and the future

Every real estate decision has long-term consequences. Investors or owners can build flexibility into their real estate portfolios by realigning their company holdings with the market and competitive forces. By doing so, you’ll create the potential for greater payout and more income.

It’s possible, but how?

Cash in on investment dollars

When your property increases in value, you may want to cash out your equity. By using that money to invest in another property or another business, you create the potential for growth. You can use your equity to negotiate a better price on a more productive location or expand your business by investing in different types of property. Selling one property and buying another can lead to higher investment returns.

Cash flow vs. capital growth
A cash flow strategy involves investing in properties with high rental yield potential and a rental income greater than the total expenses of the property, thus generating income. If your goal is to live off of your rental income, then positive cash flow properties should be your focus.
With capital growth, you’re speculating. You may forget your focus on continual mortgage debt reduction compared to the renter’s income. Capital growth relies on tenants making timely payments and taking care of the property while you pay down the mortgage.
Capital growth also involves investing capital to expand or restructure operations, enter new markets or finance a significant acquisition without changing the control of your business.
At the end of the day, there is no right or wrong answer. The right investment will depend on your situation and may change as your goals shift. Keep your goals in sight and an investment strategy in place to guide your company forward.

2. Reassess portfolio/property and tenant mix to attract more capital

Selling a multifamily property, an office building or a retail shopping center may require a closer look at the building and the tenants to attract the capital you need to sell the property. For example, multi-family properties can emphasize the high portion of A-rated tenants with long-term leases. Retail shopping centers can showcase the popularity of the property with consumers as a fun and unique experience.

To attract capital, try repositioning the property to cater to commercial real estate trends. When doing so, prioritize the following:

  1. Lead with data.
  2. Be cost savvy by preparing for the unexpected.
  3. Rethink your leasing strategy to create flexibility and appeal to a larger consumer base.
  4. Establish strong brands and a flexible portfolio.
  5. Choose the right team.
  6. Rebalance your portfolio

Investment strategies and goals can differ depending on each investor’s or owner’s situation. Overall, you should focus on generating long term stable income, creating sustainable values and finding new portfolio allocation models that optimize your returns.

4. Grow by diversifying your portfolio to protect against the risk

A diversified real estate portfolio helps achieve higher returns and minimize risk. For example, the desirability and risk involved in investing in property greatly depend on its location. Diversify by focusing on different neighborhoods, states, and regions.

Consider the following steps when diversifying and balancing your portfolio:

  1. Invest in properties across different asset classes to maximize the chances of returns while minimizing risk. Reonmoy class filters can help simplify this process.
  2. Consider core, core-plus, value-added and opportunistic assets. Your risk varies across these assets, with the core being the lowest risk and opportunistic the highest. Creating a diverse portfolio with different levels of risk provides balance.
  3. Invest in real estate investment trusts (REIT). Like stock, in REITs, investors buy shares in several commercial properties and receive dividends on the rent payments collected.
  4. Use the capital obtained from selling a property to invest in equity or debt of additional commercial real estate properties.

Although diversifying a portfolio mitigates risk and offers high returns, it also comes with challenges. Each investment requires a new set of knowledge, competency, and expertise.

5. Disruptive trends: Shaking up the CRE marketplace

Commercial real estate challenges industry leaders to look differently at conducting business and interacting with investors. For example, technology impacts communication. Google Hangouts and text messages are replacing phone calls and email, requiring investors to use the preferred communication mediums of prospects.
Additionally, the rise of technology directly affects retail spaces as people change how they shop. Pew Research reported 80 percent of Americans now shop online.
The demand for office space is also shrinking. According to a Gallup survey, 43 percent of employed Americans spend a portion of their time working remotely. Small business can now easily source products and manufacturing from overseas vendors as well as utilize virtual workers as opposed to traditional employees.

6. Commercial real estate finance disruptors

CCIM Institute Chief Economist K. C. Conway predicts that we will soon see a disruption in liquidity for commercial real estate lending. One of the biggest growth drivers altering the industry is the emergence of new property types, such as adaptive reuse, co-working, and experiential retail. With adaptive reuse, churches are becoming restaurants, airports marketplaces, and industrial buildings hotels. Landlords are staying relevant by reinventing retail space to co-working office environments and bringing in housing and hotel elements to dying malls.

Crowdsourcing networks have become a viable way of revitalizing historic buildings into thriving real estate. Crosstown Arts, once the Sears building in Memphis, was created through community involvement and continues to thrive in part due to volunteers and donations.

By seizing opportunities in various asset classes, you’ll understand the law of supply and demand. When the demand for property is high property becomes scarce, prices skyrocket and sellers’ benefit. The opposite is also true; decreasing prices create a buyer’s market. As the market constantly shifts, real estate is affected by demographic trends, interest rates, government policies, capital and financing trends, just to name a few.

With all of these economic changes in commercial real estate and capital markets, you need experts in the industry to guide you in making the right decisions. Remember, the real estate investment choices you make today have the greatest financial impact on your investments now and in the future.

We hope you find this Newsletter insightful and meaningful. Our team is available to assist you with your real estate financing and capital solutions. We look forward to the opportunity to serve you in the near future.