Balancing your portfolio isn’t something you should tackle once this crisis recedes. That process should start here and now, even as waves of disruption continue to impact already distressed assets.
While focusing on survival is critical, it is just as important to develop an integrated strategy geared to assess, manage and build your portfolio at the same time. That’s how you can seize on this incredibly disrupted market to fundamentally redefine the playing field for years to come.
We don’t have to tell you: the industry numbers paint a daunting picture. By late fall 2020, hotel occupancy rates across major Canadian cities hovered around 32%. Meanwhile, not only were the majority of office buildings not being used, 46 million square feet of office space was unleased from coast to coast and thousands of retail stores had closed for good. From V-shaped to K-shaped and everything in between, industry experts are now forecasting a wide range of potential economic recovery scenarios.
What do we see? A saw-shaped recovery is likely to work its way back and forth across the nation – and commercial real estate, in particular – before settling near pre-pandemic levels a few years down the road. During this time, players must focus well beyond building a rainy-day fund that was initially meant to keep portfolios afloat for the next year. Success tomorrow now comes down to your ability to think and move boldly today.
Taking a truly integrated approach to navigating this crisis can make a world of difference even as the market around us continuously changes shape:
Take a good hard look. Now is the time to take a hard look at where your portfolio stands and paint a clearer picture of its make-up than ever before. Mine the data. Dive into the details. Take stock of how your portfolio is doing and, important, how you can right-size it. Dust off your SWOT and benchmarking skills to compare what you hold against the market and make realistic projections for near-term cash shortfalls. Zeroing in on the qualitative and quantitative ways your assets (and tenants) are performing helps you create a tiered analysis to inform your decisions from here on out. In this period of uncertainty, cash is king. Assess your liquidity position. How much capital do you need compared to what you currently have? Where are the opportunities to free up cash to keep things rolling? Be proactive with your existing lenders and work with them to see how best to work through this challenging period together.
Manage what you’ve got very, very well. Nothing is off the table right now. However your portfolio is focused, it is imperative to manage it decisively. Where and when feasible, provide rent deferrals or abatements to harness relationships with key tenants that may pose a challenge to replace. Strategically cancel and/or extend contracts to streamline cash flow. Go ahead and review debt covenants. Create a liquidity plan to fund impacted properties, find expenses to dial down, and look for any government programs that can cover operating shortfalls. Players in the hospitality and retail space are faced with challenging calls about whether to stay open, close or consolidate. Stress-testing various scenarios can help. Using the analyses you’ve done to relentlessly manage every factor in your control can shore your portfolio up against the storm.
Build out your plans sooner rather than later. Seizing the upside of disruption means aiming to see the forest through the trees. Don’t wait to start reimagining your assets to meet long-term objectives, fuel new business models or even just to support immediate needs. We have seen empty hotel rooms be used for hospital beds, examination centres and emergency shelters; and empty office buildings being converted to residential complexes. Beyond redeveloping the assets you have, taking a forward-looking approach can also help you spot synergies, identify new partnerships, expand footprints or cement your national presence.
Warren Buffett famously quoted “be fearful when others are greedy, and greedy when others are fearful.” Investor sentiment for many commercial real estate assets is low. This is reflected through the growing delta between the market capitalization of publicly listed real estate investment trusts and the reported net asset values of their portfolios. It is now a powerful time to open up dialogue and start conversations across the public and private network. We are already seeing living case studies emerge of REITs and other players jumping on this moment to privatize or even close initial public offerings ahead of schedule.
You shouldn’t hold back, either. Evaluate marketability and saleability of non-core assets, but also think about acquisition opportunities to bolster your portfolio. Many companies are also taking the opportunity to reposition assets, evaluate ESG initiatives and identify other long-term strategies to create value for their stakeholders and the community. Now is the time to invest in technologies that can not only help you to understand and manage your assets better, but can lead to cost savings and drive operational performance. Make sure to carry out cost/benefit analyses for all these scenarios.
Recovery and growth will depend largely on your ability to create long-term value in a way that extends beyond shareholders to all stakeholders. Thinking differently and doing this work now as you continue to assess and manage the situation can help you transform ahead of the competitive pack.
Keeping your proverbial head above water during a crisis like this is one thing. But doing so as part of a comprehensive approach that sees you continuously assessing where you stand, managing what you can, and building out your business can take your crisis recovery efforts to the next level. Connecting those three buckets makes you a veritable triple threat of strategic efficiency, well positioned to not only survive this storm, but whatever next.