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Strategies for Creating Value In Today's CRE Market
It is very difficult to buy properties at favorable cap rates and make appropriate returns on equity in the competitive commercial real estate industry these days. Many property sectors, especially industrial and apartments, are trading at very low cap rates, many in the sub 4.0% area. Other sectors are in some distress like retail and hotels and these property types have large bid/ask value spreads and exceedingly high risk.
Each of the four primary CRE types — office buildings, shopping centers, industrial properties and apartment complexes — have distinct income, cash flow and physical properties that drive their valuation. These properties primarily derive their revenue stream from the tenant leases which encumber the property, but all have similar operating expenses.
To create value in this tough environment, the owner/manager must adopt various policies and strategies such as providing best-in-class management programs, implement revenue-enhancing capital improvements, alter the ownership and management structure and/or increase financial engineering to realize incremental NOI and increased value. Let's take a look at these value-added strategies.
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