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The current climate of the real estate market unfortunately cannot be described in positive terms. As the national economy continues its downslide, with the Dow Jones down by more than 50%, more than 2.5 million jobs gone, and US households having lost roughly $10 trillion in net worth, these are unprecedented times.

The California market in particular is struggling, with an 11% unemployment rate and commercial real estate is being hit hard. Twelve months ago, the real estate industry had adopted an air of caution, but today that sentiment has shifted to despair and few real estate professionals were prepared for what has since transpired.

Today, many firms are being forced to lay off staff and put projects on hold. Even well capitalized firms cannot get access to bank credit needed to break ground on projects. Where then do real estate firms go from here, and what can firms do to be well positioned when this recession comes to an end? To get ready, it is essential that we take a very realistic view of what’s in store for the next 12 months and decide what to focus on to survive today and succeed when the market comes back.

What to Expect in the Next 12 Months

Several factors indicate a difficult year ahead for the real estate industry. These are likely to include a continued reduction in consumer spending, the ongoing credit crisis, slow (if any) job growth, and the continued drop in real estate values across many sectors, including residential and commercial. According to Grubb & Ellis, LA County vacancy rates went up to 12.2% at the end of last year from 9.7 a year earlier. These factors spell trouble for the year ahead in the form of declining rents, rising vacancies, tenants struggling to make rent payments, fewer home buyers and smaller budgets for maintenance and upkeep.

While banks may begin to loosen their grip on credit in the next year, expect stricter terms and higher interest rates. At the same time, if the federal government succeeds in funding new jobs, demand for housing and commercial infrastructure should begin to rise. And while times are tough, we are seeing some bright spots. Current predictions point to Los Angeles’ stable commercial real estate, transportation links and a new Los Angeles Convention Center hotel to aid downtown LA in a quicker recovery. Our predictions lead us to believe that the market will bottom out by year’s end and this will be followed by a slow return to a sense of security. As the dust settles, real estate will continue to be seen as a strong investment; history has shown it outperforms the stock market. Then the race will begin to find and invest in great deals; how businesses are managed over the next 12 months will determine readiness to succeed when the market begins to turn around.

Focus on the Basics

Getting through the recession will require that real estate firms take immediate action to secure existing assets, minimize financial exposures and be ready to succeed when the market begins to recover. Tight economic times are impacting commercial tenants, many of whom won’t follow through with previous plans for expansion and some who will negotiate for smaller space before they re-lease. Others will struggle to make rent payments, and property owners and managers will need to consider the impact of losing tenants when vacant space won’t be easily re-leased.

While funding for property improvements will be scarce, property maintenance will be key to staying ahead of the competition, as curb appeal will impact prospective tenants and buyers who find themselves with more options. This will be especially true for residential customers who will seek out the best deals in a buyer’s market.

Retaining customers will mean keeping them happy, especially as they face difficult times. To build and keep occupancy rates up, real estate professionals must assess the needs of their tenants. This means developing relationships with tenants and looking for warning signs when tenants are struggling. In developing relationships, tenant surveys can go a very long way in helping us understand their needs and demonstrates our strong interest in preserving tenant satisfaction. The information gathered from effectively executed surveys can result in saving tens and even hundreds of thousands of dollars otherwise spent on replacing tenants. Ultimately, satisfying the needs of tenants and residents will help increase investor confidence.

Effectively Address Tenants in Trouble

Once you have assessed tenant needs and issues, look for warning signs that tenants are struggling in order to take action before rents fall late or leases are broken. Because most people cut back on spending during tough financial times, retailers often struggle the most. It is important to look for signs of struggle among your retail tenants in order to address any potential problems. Warning signs can include reduced hours, fewer staff behind the counter, or reduced inventory. At times like these, establishing good relations with tenants is essential–it will help them to open up about their financial problems. While some struggling retail tenants may ask for monetary assistance in the form of rent reductions or deferred rent payments, look at all possible solutions to choose the best course of action.

For example, some tenants may be in need of smaller space which could allow them to cut labor and utility costs. Others may benefit from expanded use provisions, allowing them to sell a broader range of merchandise or services. If, however, direct financial assistance is required, it is important to weigh the risk of possibly losing a tenant and the cost of filling a vacancy against the cost of assistance in the form of reduced or deferred rent. Does the tenant provide a benefit to other tenants by driving customers to the retail location? Is the tenant an anchor tenant who would take valuable business away by relocating to a lower cost location? While typically unappealing to landlords, financial assistance may be necessary in these times, and should be considered if it means an outcome for the greater good of your business.

Invest in Infrastructure

In tough economic times, real estate professionals will (and should) look to save money in operating costs. Making operations more efficient, however, should not have a negative impact on infrastructure. It is wise to take a close look at all operations and maintenance costs and look for ways to reduce expenditures without impacting key elements such as a property’s physical appearance. Curb appeal will mean a lot as tenants and residents shop around for the best deals. Retailers know, for example, that customers will be more likely to shop at well maintained, attractive properties. Tenants and residents will also look very closely at utility costs as they decide where to spend limited dollars.

For property managers this means that it’s time to look at costs such as landscaping and to make smart investments that will maintain curb appeal within a realistic budget. Now is a good time to consider more environmentally sustainable options for landscaping as this often equates to fewer labor hours and maintenance materials. For example, replace your lawn with low maintenance native plants; they require less watering and fertilizer then lawns. Meet with your landscaper to explore sustainable, cost saving options. If necessary, look for a new landscaper who is experienced in these practices.

It may also be time to invest in your buildings to make them more efficient in order to drive down operating costs for tenants. Look at options such as insulation and energy efficient windows and ensure that HVAC systems are running as efficiently as possible. All of these cost-saving measures will help to retain existing tenants and attract new ones in a highly competitive market.

Measure and Enhance

In the current economy, those who want to succeed need to fine tune operations, and quite possibly do different things in order to avoid repeating mistakes while staying ahead of the competition. The first step is to focus on your past work and pass judgment. Consider this a “postmortem” for each project. Take a deep, critical look at what went well and what did not, and nail down the strengths and weaknesses of each project. Use your findings to develop best practices that will help sustain your business through this economy by being efficient with limited resources while still delivering strong customer service. In tough economic times, many businesses react without considering the consequences of their actions, for example: cutting costs to create immediate savings without realizing the long-term implication. Staying calm and making informed choices that benefit your customer and your company’s reputation will help you get through this downturn and will position you well for when the market rebounds.

Define Your Brand

Having determined your strategy to best serve your customers and the needs of your company, a logical next step is to communicate the value you bring through your brand.You can help build customer confidence by focusing on what you really want to provide for your customers and what they need, and by addressing these needs through best practices you can ensure consistent service that will enhance your brand.

Understanding customer needs and creating best practices are part of the solution. To complete the equation you will need to get your team fully engaged and playing an active role in your company’s success. Employees at all levels of the organization will need to understand new practices in order to implement them, and they will also need to share messaging around how these changes and actions reflect on your company’s brand. To achieve this, consider developing key messages that can be shared across your company. Key messages should be succinct and meaningful and should provide clear examples that reinforce your brand. They should immediately tell customers and investors about what your company does to go above and beyond, and they should be backed up by proof points. Key messages are not mission or vision statements. Instead, they are concrete, meaningful statements that provide customers with a very real sense of how they are receiving better service. For example, a key message might focus on how your company has found ways to lower operating costs without diminishing the curb appeal of your property. A proof point to back this up could include how lower cost, sustainable landscape practices have been put into place to reduce operating expenses.

Your staff should understand these messages and be ready to share them with customers and prospective customers. Their buy-in will help strengthen current relations, while building confidence among investors and prospective clients.

Be Ready the Return

Through all of this, it is most important to get creative and focus on the real estate lifecycle. While this recession has been described as the worst since the great depression, it’s important to remember that it is not, in fact, another great depression. While conditions are different than previous recessions–it is not focused on a single region or industry– the economy will come back around. Taking care of these issues now will help you to be ready to maximize success when it does.

The views expressed in this article are those of the author and not GlobeSt.com.

Mark Walsh is the chief operating officer of the Schuster Group. He can be reached at 206-529-3990 and [email protected].

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