It is very difficult to buy properties at favorable cap rates and make appropriate returns on equity in the competitive CRE industry these days. Many property sectors, especially industrial and apartments are trading at very low cap rates, many in the sub 4.0% area. Other sectors are in some distress like retail and hotels and these property types have large bid/ask value spreads and exceedingly high risk.
Each of the four primary CRE types, office buildings, shopping centers, industrial properties, and apartment complexes have distinct income, cash flow and physical properties that drive their valuation. These properties primarily derive their revenue stream from the tenant leases which encumber the property, but all have similar operating expenses.
To create value in this tough environment, the owner/manager must adopt various policies and strategies such as providing best-in-class management programs, implement revenue-enhancing capital improvements, alter the ownership and management structure and/or increase financial engineering to realize incremental NOI and increased value. Let's take a look at these value-added strategies.
- Management and Leasing
It is critical to have the best-in-class management and leasing personnel and policies when managing and operating a CRE asset. There is a wide disparity in the industry regarding the quality of leasing and managing agents and hiring the right firm or personnel is critical to creating long-term value. This is especially true with apartments that are the most management intensive of the four primary property types. The difference in the net operating income on an apartment property between a good and poor manager can be 10% or more, which will substantially affect the property's cash flow and value. Many apartment owners/managers are currently refusing to lower the base rent for a tenant renewal, especially in blue cities with high vacancies and declining rents. They would rather have the tenant move and try to release a vacant unit and incur turnover costs of $6,000 to $10,000 or more, instead of lowering the base rent by $200 and losing a few thousand dollars, and keep a rent-paying tenant in place.
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