Photo by Thomas Barwick industry through 2021 and beyond . For instance , changing an office ’ s current space configurations to meet tenant needs and comfort levels will be necessary . This may include tenants asking for more open space , additional collaborative spaces , upgraded air circulation , touchless technology , and secure entryways . Making these investments now will pay dividends down the road when renegotiating leases or attracting new investors or tenants as businesses return to work , expand operations , or seek a more attractive opportunity .
Despite the pandemic , environmental , social , and governance ( ESG ) investments have increased since COVID-19 ’ s arrival . Instead of shying away , CRE firms should jump in headfirst and lead the effort . With a new presidential administration emphasizing concerns related to climate risk , investors and large tenants are starting to make ESG a requirement when looking for space . This could include items such as LEED certifications , sustainable open space , and carbon and energy reductions . Hardening of building systems to combat climate emergencies such as flooding and fire should be considered in current and new markets as well . Maximizing building energy use can also directly impact operating net income and increase asset values while attracting investors , but executive and adviser buy-in is paramount at all levels .
MONITOR CASH FLOW Taking steps in business strategy cannot be implemented without continual knowledge of cash positions and reserves . Direct knowledge of cash position along with the use and sources of funds will elicit productive conversations with financial partners . Any cash flow modeling should incorporate cyclical trends , anticipated market tendencies and accelerations , changes in tenant behavior , upcoming leases , rent rolls , and known future capital and tenant improvement costs .
Slowing rent collections in most industries and certain concessions made during the height of the pandemic have created a turbulent business environment . Improvements or maintenance may have been delayed with stay-at-home orders . CRE owners and investors should keep a close eye on small businesses that were helped with the American Rescue Plan and the Payroll Protection Program . These funds will soon dry up or may have already been used . However , PPP loans have allowed small businesses
Investors will continue to look outside of traditional markets for reliable alternative assets with strong and monitored cash flows . Firms that are able to adapt to the ever-changing landscape will be the winners .
to stay afloat by helping them continue to make rent payments and retain staff during the pandemic . In turn , this has allowed CRE landlords and investors to accelerate growth , spend resources on improvements and upgrades , receive steady rent payments ( even if reduced ), and renegotiate leases from a fair position versus one of desperation .
Additionally , borrowing rates should remain low in the immediate future to create a favorable environment for commercial borrowing and recovery . Perhaps the most important component of the cash flow model is understanding and evaluating the financing options available in the marketplace . Having proper financing available when not under financial strain will make navigating a bump in the road more manageable and allow a CRE firm to negotiate funding options from a position of strength — not one of anxiety .
With a volatile equity market and skyhigh valuations , CRE is an attractive asset class for investors . They will continue to look outside of traditional markets for reliable alternative assets with strong monitored cash flows . Firms that are able to adapt to the ever-changing landscape will be the winners .
SET YOURSELF UP FOR SUCCESS If the last two years have taught us anything , it ’ s that uncertainty can only be managed — not eliminated . CRE firms and investors can minimize ambiguity by sticking to the basics : develop and closely monitor a flexible and strategic plan ; get investment from your team , tenants , and stakeholders at all levels ; study the marketplace ; and regularly monitor cash flow to make effective decisions . These initiatives will set up firms and companies for success in a rapidly changing environment while simultaneously setting those firms apart from the competition .
Travis T . Klein , CPA , MBA Principal in the tax department of
Ellin & Tucker Contact him at tklein @ ellinandtucker . com .
Bryan C . Porter , CPA , MS Director in the audit and accounting department of Ellin & Tucker Contact him at bporter @ ellinandtucker . com .
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