Maximizing commercial real estate value: Manage properties as though always for sale

It’s a great time to be a seller of commercial real estate. South Florida has enjoyed a full recovery from the downturn that began when capital markets disintegrated in 2008.

Office and retail projects saw record sale prices in 2014 and new highs are expected to be set in 2015. South Florida also enjoyed positive office absorption with vacancies falling about 5 percent in many areas with little new construction on the horizon. Enormous institutional capital remains earmarked for commercial real estate, continuing to push capitalization rates to record lows. 

With this in mind, potential sellers must think about the steps they can take to maximize property values. Preparation for sale should actually begin in the preliminary stages of ownership and should continue with proactive property and financial management throughout the ownership period. 

Don’t Forget The Basics

Overall architectural design and property condition are critical valuation factors. Owners should continually explore capital projects to improve the appearance of a property, sustain the life of its systems and maximize operational efficiency. From the outset, owners should set aside capital reserves for repairs and plan on a consistent capital improvement program. Maintenance is particularly critical to avoid giving valued tenants reasons to not renew. 

A strong understanding of a landlord’s rights under its leases is also critical. It’s imperative that collections be kept current and rent increases and expense pass-throughs be captured and invoiced when due. While strong tenant service is critical, tenants should be held accountable for lease obligations. 

Retain Tenants 

The loss of any tenant can hurt your bottom line. Lost rental income, new tenant build-out allowances and brokerage commissions all cut into an owner’s profits. To optimize property values, build and maintain a robust tenant retention program. Key considerations include: 

” Ongoing relationship assessments: Address tenants proactively through ongoing communication to prevent small issues from turning into big issues that could lead to non-renewals. Property managers need to stay in touch with their tenants and develop a relationship whereby tenants view them as valued colleagues and problem solvers.  Tenant appreciation programs and regular surveys can play an important role in boosting tenant retention rates. 

” Monitor renewals: Consistently monitor which leases are coming up for renewal and begin renewal discussions at least 12 months prior to allow time to address critical issues.  Existing tenants in need of expansion are always your best prospects for new space.

” Identify “most valuable” tenants: Every tenant is important, but an owner needs to continuously evaluate the impact that each tenant has on the owner’s overall portfolio taking into account contributions to cash flow and credit quality.  Make sure you understand the value of each tenant and that you allocate focus and retention efforts accordingly.  

Capitalize on the Capital Markets

Evaluation of a property’s capital and financing structure is another key to optimizing value.  Consistent communication with financing professionals to regularly evaluate capital structure and debt alternatives is important in today’s dynamic market. Interest rates are at record lows, a wide variety of lenders are competing for borrowers, and there are a plethora of loan products that can be used to efficiently finance a property. Over $90 billion of new commercial loans were securitized in 2014 compared to just $2 billion in 2009. CMBS (commercial mortgage-backed securities) loans allow borrowers to lock in today’s low rates for up to 10 years on a non-recourse basis, and there are also numerous shorter term financing options available from commercial banks and investment funds. 

Start Now

South Florida is among the most sought after commercial real estate markets in the country. For property owners seeking to tap into investor demand and achieve top valuations, it’s important to deploy an ongoing, proactive and disciplined approach – and the time to start is now. ? 

Jordan Paul is Chief Executive Officer of commercial real estate brokerage NAI Merin Hunter Codman. Contact him at jpaul@mhcreal.com or 561.471.8000.

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