RISMEDIA, April 22, 2010—When asked to sum up the year ahead, Stan Ross, chair, USC Lusk Center for Real Estate, believes values will further drop, foreclosures and delinquency rates will increase, and a limping economy likely will continue to crimp property cash flows. But capital will start to come in at a time when higher lending rates, more stringent underwriting, increased equity requirements and recourse terms will continue. So with all this doom and gloom, how do you survive during these times?
This year, the real estate industry has to focus on survival and solutions, looking toward expansion and new opportunities in a distressed market. The best approach for coming out of the recession on the upside involves four steps: checking your assets and liabilities, performing an organizational restructuring, improving relations with lenders and going after some great opportunity ‘buys.’
1. You have to inventory all your assets and liabilities under a new economic model. You also need to develop a whole new set of macro assumptions, not just on a national basis, but location-by-location and project-by-project. Look at your operating assets in terms of keepers, sleepers and weepers. A ‘keeper’ is an asset that has healthy or predictable cash flow, positive long-term horizons, a high potential for growth and very high quality. A ‘weeper’ suffers from low quality, deferred maintenance, poor location, low cash flow, tapped-out financing and little long-term value. Finally, the ever surprising ‘sleeper’ asset is well located with slight deferred maintenance, has medium-term leases with a high potential for cash flow growth and offers a unique product line to the market. The sleepers are ripe for converting to alternative uses.
2. Conduct an organization review and consider which jobs are really needed and whether students or part-time senior citizens could fill some roles. While this job analysis is painful, it’s a real opportunity to reposition the company and be more efficient going forward. After the job analysis is done, circle back to determine if you can shrink your current space and outsource services such as accounting, legal and maintenance.
3. There should be no shocks or surprises for your lenders. They should know what is taking place and they’ll expect to work with you on a plan with options for loan modifications and restructuring.
4. How do you find the real opportunities? They may be closer to surfacing than you thought. The banks now own $3 trillion of residential mortgages (enough for everybody), $1.5 trillion of corporate real estate loans, and $1 trillion of consumer debt. Most of it will be sold to help the banks regain the confidence of regulators. They will start moving these assets by year end so get ready.
Another possibility for acquiring high-quality assets at a good price rests with the cities and states willing to sell landmark buildings, and lease them back to current tenants.
I believe if you follow the steps we just discussed, you will not only survive, but will emerge stronger, more efficient, effective and profitable. Give me people and we will have growth.
For more information, visit www.naiop.org.