Across the commercial real estate (CRE) industry, rising expenses have skyrocketed the cost of utilities, insurance, payroll, debt service, and more. In the last market cycle, solid deals and extra cash were easy to come by; today, the tides have turned.
Margins have tightened and many asset managers are uncertain whether enough cash will remain to continue business after paying the bills. As expenses rise, CRE teams are seeking ways to cut costs and protect cashflow – and asset managers are the superheroes leading the charge.
We partnered with Wealth Management Real Estate (WMRE) for a webinar about Optimizing Cashflow in an Uncertain Market. Speakers Anne Hollander, Chief Strategy Officer at Thirty Capital; Jason Kelley, Chief Financial Office at Thirty Capital; and Mark Runde, Managing Director of Real Estate at Thirty Capital Performance Group, candidly discussed how to assess new or current market deals, optimize your investment horizons, and determine the next best steps for optimizing cash across your portfolio
Watch the webinar on-demand to hear the full conversation. Or, read ahead for some highlights from the discussion.
Expense Growth is the Silent Killer for CRE Firms’ Budgets and Forecasting
Expense growth across controllable and non-controllable expenses has changed significantly since 2018. According to Chart 1, in 2022 taxes were the only expense that had a lower growth rate than the prior year, while every other category continued to increase. Particularly, insurance is a difficult expense to navigate because of the limited control over managing your insurance premium. The general consensus amongst the panelists is that expenses will continue to rise. Without increased revenue, rising expenses will more than likely cause your NOI to decline.
Chart 1: US Multifamily Annual Expense Growth
Source: Freddie Mac CMBS, Thirty Capital Performance Group, I/E IQ Benchmark
Asset Manager vs. CFO Perspective: Forecasting for the Year Ahead
When budgeting and forecasting for the year ahead, Asset Managers and Chief Financial Officers (CFOs) must consider factors including market trends, portfolio performance, debt vs. cashflow, etc. to make the most informed decisions. Although there may be overlap in the factors to consider, asset managers and CFOs have differing perspectives when it comes to budgets and forecasts.
Asset Manager Perspective
Panelist Mark Runde shared his recommendations for asset managers as they begin to think about the year ahead. He highlighted four main steps for 2024 planning:
Step 1: Budget realistically and conservatively
Budgeting realistically and conservatively involves being honest with yourself and understanding current market dynamics and how you compare to competitors.
Step 2: Manage expenses, debt, and capital projects
Expenses, debt, and capital projects are three key areas of a CRE portfolio that need to be managed and balanced. Specific to capital projects, Mark Runde shared that his strategy is a case-by-case scenario on discretionary capital. He recommends looking at both the costs and benefits of the project. For example, consider whether the project will bring in more revenue or make the property more attractive to renters.
Step 3: Assess market dynamics at the property level
Assessing market dynamics at the property level involves understanding what other similar properties are charging for rents. An assessment can also help you understand whether a decline in your property is a result of operational inefficiencies or market dynamics. Once you assess the market and understand the root of your firm’s challenges, you can decide whether to play offense or defense and determine the best steps forward.
Step 4: Evaluate communication cadences and involvement with property managers
The dynamic between asset managers and property managers has changed in recent years. Previously, asset managers communicated with regional and property-level staff monthly and then “as needed” for issues that may arise. Today, Mark shares that he now communicates with property management and visits some properties weekly, depending on the market and what’s happening at a particular property.
Chief Financial Officer Perspective
Panelist Jason Kelley shared his perspective as a CFO as he begins to think about the year ahead. He highlighted three main factors that will be the most important to consider in 2024:
Factor #1: More cash reserves
Building more cash reserves is one of Jason’s top priorities when budgeting and forecasting for 2024. He says he “is not leaving cash in the property operating account.” Rather, he is investing in yield earning accounts. Essentially, he is making sure the property has the cash it needs while also ensuring that cash is placed where it can be best utilized.
Factor #2: Better planning and forecasting for cap/ex
Regarding cap/ex events, Jason shared that he is “tightening down the numbers” and getting more specific on what the cap/ex is going to be. The major question is “Are we going to get ROI?” And hopefully that ROI will be realized within 12-18 months.
Factor #3: Tightened risk environment for lenders
In today’s tightened risk environment, deals are still getting done despite declining transaction volumes. Jason shares that there is “an appetite to lend if you’ve adjusted to the market”. However, a lot of clients haven’t quite adjusted.
Know Where You Stand: Budgeting and Forecasting in 2024
An important component of successful budgeting and forecasting is knowing where you stand. By this, we mean understanding your valuations and debts and how they relate to one another. Then, it’s important to assess your property operations, NOI, and cashflow. Finally, modeling your forecasts to optimize your investment.
Our panelists summarized these three actions to help you “know where you stand”:
- Produce a market assessment to include a market rate & statistical valuation analysis
- Perform asset evaluations, including a comparables analysis, debt forecast, and equity forecast
- Model asset, debt, and equity forecasts for high-confidence next steps to communicate to your team & investors
Our team at Thirty Capital Performance Group offers real estate advisory services and provides independent, unbiased insights and recommendations. These services can help you understand where you stand so that you can more accurately prepare your 2024 budget. Contact us today to speak with an expert!
Want to learn about these topics in more detail? Click to watch the on-demand webinar below!