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By Altus Group | April 15, 2020

Let’s wait and see ……

Given the constantly-changing COVID-19 environment we are currently operating in, many owners, investors and managers of commercial real estate have been taking this approach.

Yet mitigating risks requires a proactive risk management game plan – like the approach commercial real estate owners, managers and investors are now taking. Since buy and sell decisions for real estate investment firms rests on astute portfolio construction based on timely valuations, more of them are adopting preemptive risk abatement tactics.

Given the uncertainty in the market, many asset owners are now increasing the frequency that external valuations are being conducted,  with some open-end funds moving to a monthly valuation program for their entire portfolio.

Addressing today’s shifting landscape requires more, rather than less, information. Knowledge is power in the current environment. With the market changing every day, whether you have a single property or a portfolio of assets, timely insight is essential to determine tenant retention strategies, rent relief options and other risk abatement measures that will give you a better understanding of asset value.

Here are four steps owners, managers and investors can take to mitigate risks to your commercial real estate assets during the turbulent COVID-19 market environment.

1. Conduct a sensitivity analysis to inform your decision making in this new reality

What will our cash flow look like for the next six months? Twelve months?

What will the short-term and the long-term performance of our portfolio look like?

To achieve greater clarity for decision making, testing “what-if” situations helps to determine the effects of variables on investment returns and to ascertain potential outcomes. Conducting a sensitivity analysis can provide confidence when assessing a range of what-if scenarios.

Sensitivity analysis involves changing one variable at a time over a possible range of outcomes to evaluate the effect of each change. Most important, it can demonstrate the impact a change in variables would have on the value of a property or portfolio.

A sensitivity analysis can take into account a wide range of factors that might impact a property’s cash flow and computes how a change in each factor would affect value. For example, modelling cash-flow sensitivity can help forecast and address any potential shortfalls before they happen.

It’s possible to model what monthly cash flows will look like under a wide range of different scenarios.

This reveals when cash flow deficiencies will occur and what strategies will be effective when. For instance, when might you have to provide rent relief? When might you require additional bank funding? Do you need to defer your next project?

This type of analysis can also establish most likely, worst-case and best-case scenarios.  As well, the results of these scenarios can be combined with insight into what peer companies are doing. This provides owners, managers and investors with an enlightening basis for comparison of best-case and worst-case for similar properties.

Join our webinar Portfolio Modeling and Analysis For Unprecedented Times to see how ARGUS Enterprise can be used to rapidly model, analyze, and report on individual properties and entire portfolios against a set of key scenarios related to the impact of the pandemic.

2. Appraise your commercial real estate assets

In the rapidly shifting market there’s a growing disconnect between valuations of real estate assets from even a few weeks ago and those of today. Given the future impact the coronavirus pandemic could have, timely updates on property value – to understand how markets and asset classes are performing and where your properties stand in the current market – are more important than ever before.

Conducting property and portfolio valuations at frequent, regular intervals can enable owners and investors to stay on top of what’s happening, meet reporting requirements and support investment decision-making with a transparent view into all assets.

For investment portfolios containing real estate holdings, having an appraisal completed in current market conditions may offer rebalancing opportunities. For example, if real estate is held as part of a larger investment portfolio, it may be overallocated right now as the other assets in the portfolio may have experienced a decline in value. Conducting a valuation might be beneficial in reducing the allocation percentage of real estate holdings – without having to sell assets in an uncertain market.

3.  Assess highest and best uses of properties

Once properties have been updated with current-reality value and projections, review these assets subjectively to determine whether the current use of the property is the best use going forward.

Determining the highest and best use of a property can optimize its potential by considering the current use, potential uses and their corresponding value. The bottom line is: if there are potential alternative uses, which direction provides that greatest return?

This is an opportune time to evaluate whether there might be a different use for a commercial real estate asset that could be more productive and profitable.

4. Conduct thorough due diligence before making decisions

Before making any strategic decision regarding a property, undertake thorough due diligence. This is critical for risk-informed decision making. Proper due diligence substantiates key assumptions when valuing opportunities and identifies benefits, liabilities, risks and uncertainties.

While the process is designed to address the specific circumstances of a property or group of properties, the scope generally encompasses commercial, legal, financial and tax due diligence. Bring qualified, experienced external advisors into the process to ensure reliable results.

Risks in real estate cannot be completely eliminated; they need to be managed to ensure they are compensated with corresponding returns. Canada’s most successful real estate companies are not sitting back to ‘wait and see.’ Equipping themselves with timely information and careful due diligence, they are strategically manoeuvring through the disruption. Other commercial real estate holders would be wise to follow this lead: gather real-time information to begin developing effective mitigation strategies.

Opportunities will ultimately exist during these uncertain economic times, and companies that are knowledgeable and prepared will be in the best position to capitalize.

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