Why now is the time
As the commercial real estate market looks likely to shift to a buyers’ market, commercial property owners and portfolio managers need to pay close attention to what future buyers (owners and tenants) are looking for. It’s no longer enough to tick the boxes during pre-acquisition due diligence or just prior to disposition. Maximizing the long term-value of individual properties and your entire portfolio is an ongoing, forward-looking process.
This means a proactive approach to risk management, compliance with ESG (environmental, social and governance) criteria, and upgrading your property portfolio to make it more resilient against future shocks. In turn, you’ll likely sell your properties at a higher value when the time comes and enjoy lower vacancy rates with higher rents.
Read on to learn how you can future-proof your portfolio so that when the next recession hits or when you look to sell an asset, you’ll be more than a few steps ahead of the rest.
Adjusting to the demands of an environmentally conscious market
Today’s buyers and renters are more aware than ever of the importance of energy and water efficiency, air quality and more. Property owners must consider how their portfolios will serve occupants over the long-term. Will they use less energy and reduce their monthly bills? Will they still be able to work remotely if there is a power outage? Will they have enough water during a drought?
One place to start in answering some of these questions is understanding why and how commercial properties lose value over time.
- Operational inefficiency
As building systems age, operational efficiency declines, leading to increasing maintenance costs. Old systems take their toll on building occupants as they consume more energy (leading to higher bills), operate slower, and decrease efficiency. As technology advances, users expect to benefit, and for buildings to follow suit. - Falling out of compliance with requirements and standards
As time progresses, so will building efficiency standards property owners must adhere to. If your building is out of compliance, you’ll be subject to fines. Energy compliance laws vary from city to city, so it’s important to stay informed. In short, you need to know your city’s standard and work to meet it if you want to maximize your property value. Lack of adherence to the standards could also affect the selling price and marketability of your property. - Not complying with ESG criteria
ESG (environmental, social and governance) criteria are non-financial factors that are becoming increasingly important to CRE investors who use them to identify potential risks and growth opportunities. Property owners need to carefully plan how their portfolios measure up to ESG criteria if they want to maximize value over time.
A proactive versus a reactive approach to portfolio management
Asset managers focus on optimizing the performance and capital investment of their CRE portfolios, but are they comprehensively managing current and future risk? Future-proofing your assets requires a continuous spotlight on various areas of risk management and how they may affect long-term value.
Proactively managing your portfolio means coming up with a strategy and a long-term plan to address building conditions, operational efficiency, required standards and ESG criteria. Doing this now versus waiting until you’re getting ready to sell means you’ll remain competitive for leasing in a challenging market. Your properties will retain their value and command an optimal selling price when it’s time to sell.
Steps to future-proof your portfolio
Start by evaluating all your assets to get a better understanding of what you need to do to get your properties up to market standards, the costs associated, and whether it’s worth it long-term.
Some useful steps you can take include:
- Energy audit
Energy audits show you where you are today and what capital projects would increase your efficiency. An energy audit can inform practical steps such as feasibility of off-grid energy supply, swapping light bulbs, changing the HVAC systems, installing white roofs, and more. - Retro-commissioning
Retro-commissioning helps you evaluate all your building systems and re-tuning them so they work properly. In some cases, you’ll swap out faulty or aging equipment. - Green certifications
Applying for a green certification from an independent body can verify your buildings meet certain benchmarks, giving you credibility in the market. - ESG services and climate risk analysis
Analyzing your climate risks and defining your ESG goals is step one. From there, you’ll know what to do to reduce property risk and demonstrate you’re moving forward toward achieving your goals.
Final thoughts
With the potential for a recession, there’s no better time to ensure you’ve accounted for all your portfolio risks. This helps ensure you’re optimized for long-term success and are ready to withstand the challenges of an uncertain future.
While optimizing an entire real estate portfolio can feel like a huge task, starting with something simple like an energy audit can help you make giant leaps towards managing future risk.
Seek expert advice from our experts, and we’ll help you start today.
