After a challenging year of interest rate hikes (7 in total) and a possible recession on the horizon, the commercial real estate landscape has shifted, with some drawing parallels to the 2008 financial crisis. Whether it’s as bad as that is unclear, but what’s undeniable is that the markets are volatile, and property managers are changing how they do business to locate quality deals.
To help navigate the murky waters and understand how leaders can thrive in our current economic climate Mike Sebastian, Industry Principal at AppFolio Investment Manager, sat down with two leading experts to discover how they’re approaching the challenging markets and changing operational strategies to create a competitive advantage.
In this blog, we look at the key takeaways you can implement in your business and a product that can free up operations, allowing your team to focus on growth.
What are the current issues in the market?
“The biggest challenge for general partners is macroeconomic conditions out there” — Ahsan Daredia, Principal at Dhanani Private Equity Group.
If you’re in commercial real estate, you’ve undoubtedly wondered how much more interest rates can rise at least a couple of times this past year.
Rising interest rates mean debt becomes more expensive, and mortgages rise. This pressure is compounded by the rising inflation, which has impacted US consumers at all levels. In addition, commercial real estate buyers face higher rates and lower access to liquidity, creating a squeeze.
These factors have contributed to a climate of unrealistic buying and selling expectations. As sellers want access to interest rates from earlier this year, purchase prices don’t reflect the current market environment. Due to this, managers and general partners are backing out of deals earlier than planned or relying on their networks to locate deals that will provide value for investors and to target off-market opportunities.
Four ways deal makers can pivot to find deals in a tough market
While it’s essential to focus on the fundamentals that drive decision-making, such as location, traffic, capitalization, and rental rates, expert managers are changing their strategy to locate opportunities.
Some ways to achieve this include:
1. Leveraging social channels, listing pages, and networks
Leading social media channels such as Instagram and TikTok are hotspots for locating deals that can be actioned quickly. In addition, the more traditional listing sites such as Craigslist, Zillow, and Nextdoor are equally valuable tools for targeting deals even in the commercial space.
Thanks to lower competition on these platforms, brokers and agents can find listings to get in ahead of time, gaining an edge over the competition. At the same time, pay attention to professional relationships, as parties ranging from property lawyers to commercial bankers may also have insights into more exclusive deals.
2. Being more selective and buying land
Due to market conditions, taking a more selective approach can help maximize returns for investors. This may mean leaving deals earlier than planned, considering distressed assets, or changing the buying strategy altogether.
Due to uncertainty regarding interest rates, inflation, the ongoing WFH vs. in-office struggle, Covid-19, and the war in Ukraine, predicting future trends has become increasingly more difficult.
Land purchase is a smart move in the short term as build to rent is a growing trend in the market. Buying land at decent square footage means you’ll have a foundation to build an in-demand project rather than filling a pre-existing asset that may not be desirable in the years to come. However, note that land may only be an attractive option for some limited partners looking to get in on a deal.
Remember that real estate is a long-term game, and underwriting deals for the sake of it can alienate investors and destroy reputations.
3. Building out the business reputation
“Branding, reputation, storefront to enable clients to look at the client, who they are and what they stand for is going to create that competitive advantage” — Juwan Kadir, Sr Solutions Engineer at AppFolio Investment Manager.
Now is the perfect time to strengthen brand presence, build a reputation in the market and improve client experience.
Flagging trends such as the shifting investor base to a younger demographic and determining their needs will provide a competitive edge. As younger investors begin to take over for parents and families, we may see values and investing trends evolve. Preparing for this generational shift will position your business for more substantial future growth. For example, modernizing the client experience with technology such as investor portals, creating learning opportunities, or focusing on sustainability are great ways to build stronger relationships with younger investors in 2023.
4. Leverage service software for operational success
Every moment counts, with more commercial real estate businesses competing for fewer deals.
Syndicators are aggressively pursuing deals to extract as much value as possible. The question is, how will you determine a competitive advantage in the space?
Optimizing workflows and consolidating small but time-consuming processes through the Appfolio Investment Management cloud allows commercial property specialists to empower their teams to focus on locating the best deals and maximizing efficiency no matter the market conditions.
With Appfolio, deal makers are examining their data, strengthening client relationships, reducing overall costs, and positioning themselves for success in the market.
When considering automation software, remember to look at current features and functionality and the implication of the relationship, and whether the partnership will develop in the challenging years ahead.
Finding great deals is still possible
Unforeseen events, aggressive interest rate hikes by the Fed, and looming inflation have all contributed to a harsh economic climate. Aggressive rate hikes may only be the beginning as we enter a challenging 2023, yet where there is a challenge, there is also opportunity.
Leading property managers are thriving in the current climate by shifting focus and exploring alternate means of locating deals. Now is the time to shake things up, build your business presence, and save time and costs by partnering with a leading property software.
To learn more about how Appfolio can help free up your team to do what they do best and provide a competitive advantage to win deals, schedule time with an Appfolio Investment Management expert today.
