Commercial Real estate is cyclical. No one can predict exactly when the economy will tip into the next recession but most experts agree we’re in the later stages of this current cycle. The question commercial real estate owners and operators should be asking themselves is not when the next downturn will hit, but are they prepared for it when it does? Now is the time to take advantage of what’s left of the good times, while money is relatively cheap, vacancies are low and rents are high to prepare for the inevitable downturn. Here are some tips to get you started:
1. Conserve Cash
Start building your reserve fund by forgoing owner distributions. It’s still your money; just keep it in the operating account for easy access. This is arguably the biggest mistake investors make. Do you have sufficient reserves set aside for tenant improvements, leasing commissions or periods of negative cash flow? If not, start building them now.
2. Review Loan Terms
Is your loan coming due within the next couple of years? During the last recession many investors lost their properties, not because they were delinquent on their mortgage payments but because they were unable to refinance their existing loan.
Your bank will look more favorably at your financial ratios now. As soon as we head into recession territory, things will be different and not in a good way. Don’t wait. Extend your loan term now.
3. Take Care of Deferred Maintenance and Capital Improvements Now
Have you been putting off deferred maintenance…that new roof? Restroom upgrades? Painting? Parking lot improvements? What projects do you plan to complete in the next three years? Do it now. Owners should strive to have their properties in excellent condition ahead of a correction so their product will remain attractive and competitive.
4. Understand Your Break-Even Point
Based on your current rent roll and operating expenses, what vacancy rate will result in the property’s monthly cash flow equaling the mortgage payment? Know your number and protect your breakeven point.
5. Sell at the Peak
This is your chance to maximize the sale price of your property. The main reason sellers put off selling when times are good is that they don’t want to pay the capital gains taxes. Consider selling now and 1031 Exchange into a different property with fewer management responsibilities, consistent cash flow and less exposure to the downturn.
If you think your property has reached peak value and you’re happy to own it another 5-10 years, then ride it out. But if you aren’t confident in the area, the property, the tenants or your desire to hold the property then you should call your trusted commercial real estate advisor and start the process. Do it now.
Final Thoughts
The next recession will not be felt evenly across all locations or property types. How well-positioned for the future is your property? At howardcommercial, we advise both the client needing to determine the viability of a new investment opportunity as well as the client actively pursuing the sale of an existing real estate investment property. Give us a call at 314-821-0085 or send us an introductory email at doug@howardcommercial.net
