Building resilience and sustainability - by David Krik

June 08, 2018 - Appraisal & Consulting
David Kirk
Kirk & Company

The built environment is vulnerable. Commercial real estate is particularly well measured for resilience and sustainability because for-profit holding entities do not normally have access to rainy day funds or endowments like public and non-profit property owners respectively. Not realty nor personal property, cash flow and cash balances are measured respectively of performance and sustainability for commercial real estate. Resilience and sustainability in commercial real estate investment are reserves, liquidity, preparedness. Borrowing the lexicon from government recovery plans from natural disasters and terrorism, commercial real estate adds economic traumas to recovery plans and sustainability. 

Professional asset and property management have been the stewards of this important dimension in commercial real estate investment. Only the labels are novel to investment managers. Some slack is anticipated in property markets. Fundamental economic stability, if not strength, persists broadly, providing traction broadly in geographic sub markets. Resilience relates to existing investments and portfolios as well as new investments. With extraordinary volatility in the capital markets, and commercial real estate investments occurring deeper in the risk spectrum, late in the cycle, in a rising rate environment, with upward cost pressures, property investment opportunities are select.  Solid market and property diligence is requisite for credibility and sustainable success. The competitive commercial real estate market has added pressure to operations and bottom line. However, reserves, reinvestments and refinancing are all requisite strategies for resilience and sustainability. 

Reaching for increased liquidity is a simple priority impacting operations and balance sheet for single property and portfolio investments. Requisite or reasonable levels of liquidity can be underwritten with familiar methodologies. Sellers often sell deferred maintenance and capex requirements. Accordingly, reinvestment is overdue. And working capital and reserves need replenishment. And foreseeable operating shortfalls and capital planning must be forecast for the holding period. Short-term market imbalances could be less forgiving even without natural disasters, terrorism or economic traumas. Underwriting for changing the capital stack will include consideration of liquidity and capital plan. 

In addition, risk review is getting renewed prominence. For the traditional risk exposures, detailed overlays are applied. Resilience is almost a risk category. Generators come to mind. Duplicate or redundant grid systems. Drills for preparedness and recovery. And adequate specific coverages without exclusions, exceptions or limits. And reinsurance. Again, not usually in the purchase price, historic operations or coverage. Building resilience and sustainability has been updated. Awareness is a good start. Funding is more important now. With liquidity, new opportunities are accessible. Nimbleness is more important in operations. Tightening underwriting is prevalent, and good practices are not as loose and blurry. Time is here to capitalize resilience and sustainability for commercial real estate investing.

Enjoy the summer!

David Kirk, CRE, MAI, FRICS, is principal and founder of Kirk & Company, Real Estate Counselors, Boston.

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