Thursday, August 04, 2011

[GUEST POST] Managing Commercial Real Estate Projects

There are three main types of commercial real estate: investment, retail, and office.  Which of these you deal with will ultimately determine your exact management style:

  1. Investment -- property considered only as a moneymaking commodity, not used explicitly for any purpose other just ownership.  This is a basic and easily managed type of real estate: in essence, there’s only one participant, the owner.
  2. Retail -- space used for shops or stores.  It’s a more complicated and challenging project to manage, as participants include owners and customers using the property for buying and selling, in addition to the owner.
  3. Office -- property used primarily for business tenants.  This type of commercial real estate is also a challenging one to manage because, on top of the property’s owner, there is the company and its workers to consider.


All three types can involve a high amount of monetary risk (i.e., “Let me see how this goes; I might make a fortune, or I might end up broke”).  All three usually involve complex financial desires and plans, which can be expansions of already-begun real estate plans (i.e., owners will start in one area and have a strategy for where they’ll go next) or -- obviously in the investment type of property -- investment (i.e., owners will use those properties to make a bet for future revenue).

As the manager of a commercial real estate project, it’s your responsibility to communicate with all of the participants, depending on which type of real estate you’re dealing with.

WHY PROPER MANAGEMENT IS IMPORTANT

To get a good view into why the management of commercial real estate can be so important, it may help to look at one precise example:

The Federal Deposit Insurance Corporation (FDIC) is one of the foremost authorities in the country on commercial real estate (CRE) loans.  Stay familiar with its findings, so you can be at the forefront of any important changes in commercial real estate operations, regulatory or otherwise.

The FDIC has elucidated one of the myriad ways commercial real estate has to be managed well: it has a profound impact on the banks that manage it.  The number of American bank failures in the ‘80s and early ‘90s can be most easily attributed to over-investment in commercial real estate, and poor management inside it.  This is why your managerial role in the complexities of commercial real estate is so vital.

According to the FDIC, these loans are a core business for many major banks, but banks must still carefully monitor and analyze the real estate markets to determine proper and healthy loan rates.  Communication needs to happen between the bank and the owner to make this process run smoothly, and that’s why managers need to be alert to all the details.

For more information from the FDIC on commercial real estate’s effects on banks, go here.

STAYING IN REAL ESTATE

Protecting your assets is always important, especially from the standpoint of risky and complicated maneuvers like commercial real estate.  But what if others are telling you, to throw in the towel-- sell your properties--give up for the moment?  The current real estate market in the country is tumultuous, and commercial real estate is being hit especially hard; but it’s crucial that you don’t give up so easily.

If investors, banks, or other partners in your real estate project are advising you to liquidate your portfolio (they might be intimidated by the economic downturn in the market today, and therefore more risk-averse), it is probably better for you to stay strong, keep hold of your property, and just wait.

First of all, it will be very difficult to get a good price in the current real estate market in the US anyway. More importantly, the philosophical truth of any macro-economic market runs against immediately seeking caution, selling, staying safe: demand does not necessarily come directly after supply, so waiting might be more fiscally sensible.

The real estate market won’t see, in the immediate future, all of its recent strokes of fortune: financial liquidity in the markets, the sudden value increases, the quick tempo of buying and selling commercial real estate properties, or the huge growth in occupancy and rent.  As a manager, you would do better to just weather the storm.  Here are several ways to do exactly that:

  1. Manage expectations - clearly, the last decade hasn’t been a wholly accurate indicator of what the commercial real estate market is doing, so be careful with what you’re hoping for.
  2. Understand the rules - be familiar with the current rules of REO (real estate owned) business, as well as with how the FDIC is currently auditing loans.  These are important details for comprehensive real estate management.
  3. Let your investors know the plan - be up-front and share information with owners, investors, and the bank.  They’ll be more comfortable if you stay open and charitable with your information.
  4. Contact your lender - begin talking to him/her, and stay honest with all your management ideas. It’s better to stay cautious -- be too open with ideas instead of not enough.
  5. Keep a safety net - you can eliminate risky dividends and distributions; explore possibilities of finding extra equity capital from outside investors; defer capital improvement projects if you’re able to, or just monitor operating expenses.  Whatever you do, make sure you have a safety net if the project runs into trouble.
  6. Don’t panic - understand the situation; deal with problems as soon as you can get to them; but always stay on track.  Make realistic business plans and conservative estimates, based on the markets of today instead of previous ones.

For more advice on protecting your real estate portfolio, go to here.

Once you have a keen grasp on these three factors -- distinguishing types of commercial real estate, being aware of the FDIC’s important connection to the field, and knowing how to protect yourself when the going gets tough -- then managing commercial real estate projects can be an exciting and valuable pursuit.

Jason Carter is a freelance writer for Parks Edge Park City. Real estate in Park City, Utah is a great investing opportunity, the views are fantastic and these Park City homes offer a great value.