What is the best way to dispose of underperforming assets in a commercial real estate portfolio?

What do underperforming commercial real estate assets look like? 1) Income Comparison: If your yearly earnings and per square meter rates are lower than others nearby, it's like leaving money on the table. What's stopping you to charge above market rate? 2) Poor Occupancy: When fewer tenants are interested in your property compared to others. Find out the reasons why does your asset attract less tenant interest than others? 3) Get WALE: Think of WALE (Weighted Average Lease Expiry) as an indicator for your property's future. If leases are expiring sooner rather than later, it's like having uncertain for your next purchaser to purchase the property. What can you do to make sure your tenants want to stick around longer?

Some factors to consider to identify the underperforming assets: 1. Local Market Conditions such as job growth, population trends, and economic indicators can impact property performance. 2. Comparable Analysis of the performance of the properties to similar ones in the same market. If the properties are underperforming relative to the market, it may signal an issue. 3. Age and Condition such as older properties may require more maintenance, impacting overall performance. 4. Assess the quality of tenants and their payment history. Frequent turnover or issues with rent collection may signal problems.

For the Corporate Occupier, the underperforming asset is the Production/HQ/Manufacturing Plant, Warehouse, Office, Lab or retail location that no longer delivers the margin contribution above company WACC (Weighted Average Cost of Capital). Many issues contribute to Margin erosion from the property. In many cases the higher and better use for the property is an alternative use (residential, warehouse, retail) and consolidation/closure of the operations deliver savings. Fully depreciated buildings (non-critical) can be re-envisioned for higher value use with site plan designs and can be sold to maximize value. Critical under performing assets can capture value through sale/leaseback delivering cash without yielding operational control.

Disposing of underperforming assets requires a strategic evaluation. Firstly, analyze the reason behind its underperformance, whether it's location, condition, or market trends. Consider if redevelopment or repurposing could enhance value. If not viable, selling might be the best option, yet timing is key. Wait for favorable market conditions if possible. Engage a skilled broker who can guide based on market dynamics. Tailor strategies to each asset for the best outcomes.

These are the ways someone can identify underperforming assets. 1. Income: Compare rental income or lease rates against market averages and the property's potential. 2. Expenses: Assess operating expenses and maintenance costs relative to income to gauge efficiency. 3. Occupancy: Evaluate vacancy rates and tenant turnover compared to market norms. 4. Cash flow: Examine cash flow trends and profitability over time. 5. Market trends: Consider local market conditions, including demand, supply, and rental rates. 6. Physical condition: Assess the property's condition and potential for renovation or redevelopment. -Good Luck

Here are some common exit opportunities for such properties: 1. Listing the property for sale on the open market is a straightforward exit strategy. 2. Explore options such as converting commercial spaces into residential units or repurposing underutilised land for alternative uses. 3. Terminating leases early may allow for property renovation, repositioning, or sale without the constraints of existing leases. 4. Offer lease buyouts to tenants if the property is occupied.

Once you've identified underperforming assets, carefully evaluate various exit strategies. Consider options such as selling the property, restructuring leases, or repurposing the space. The decision should align with your overall portfolio goals and market conditions. For example, if the market is favorable for selling, divesting the underperforming asset may be a strategic move. Alternatively, if restructuring leases can improve cash flow, that might be a viable option.

Here are a few steps commercial property owners should consider when planning their exit: 1. Assessing Timing: Why sell now? Consider whether it's due to market conditions, cash flow problems, or other reasons. Is it because you believe it's the peak of the property cycle, or are there pressing financial concerns? 2. Exploring Value-Add before selling: Before selling, explore alternative ways to unlock further value. For instance, consider converting a low-occupancy commercial building into a high-occupancy hotel or student accommodation. This transformation could significantly increase the property's attractiveness and profitability, potentially resulting in a higher selling price down the line.

One thing I have found helpful is repositioning. It always works in the long term and yields much profit in the end. However, a lot much be taken into consideration when deciding to reposition as it tends to come with other cost which may not be a part of the budget

Deciding on an exit strategy for underperforming assets requires a nuanced approach that considers both financial and strategic factors. A good exit strategy should not only mitigate losses but also potentially position your portfolio for future growth. Whether opting for a direct sale to liquidate assets quickly, engaging in a property exchange to consolidate holdings, or pursuing redevelopment to enhance value, each path should align with broader investment goals. Evaluating the cost of exit, market conditions, and tax implications will ensure the chosen strategy is both pragmatic and profitable.

Implementing the exit strategy of an underperforming asset can dramatically improve the short and long term performance of your portfolio. By implementing an exit strategy and freeing up cash that could be used to invest in properties that will provide higher cash flows or appreciation will have an impactful effect on your long term goals. Family offices, who tend to have longer hold times benefit from periodically adjusting the assets in the family holdings to better performaing assets that align with current market conditions. As time passes, investors must make adjustments. Implementing exit strategies are key.

Some ways to get started: 1. Consider forming joint ventures or partnerships with other investors or developers. 2. Partnering with individuals or entities with the expertise and resources to improve the property's performance can be mutually beneficial. 3. If the property's underperformance is primarily due to financing issues, consider debt restructuring or refinancing. 4. Convert the property into a short-term rental or vacation rental if the location and market demand support such usage.

After deciding on the most suitable exit strategy, proceed with its implementation. If selling is the chosen path, engage with real estate professionals to market the property effectively. Prepare all necessary documentation, set a competitive price, and negotiate with potential buyers. If restructuring leases is the strategy, collaborate with tenants to negotiate terms that align with your financial objectives. Regardless of the chosen exit strategy, ensure a systematic and well-executed approach to maximize returns.

Assessing your property's potential and comparing it with others involves several key steps: 1) Identify which properties in your location area are selling for the best prices. Understand the current market trends and pricing dynamics. 2) Elevate your property to the standard of those selling for the best prices. This may include renovations, upgrades, or other enhancements to increase the property's appeal and value to potential buyers. 3) Consider the potential return on investment for any improvements or upgrades and weigh them against the expected increase in property value and selling price. 4) Develop a project schedule and timeline to ensure that you can meet your desired timing for selling the property.

Actually I disagree with the fact that there is so much risk in there when it comes to disposing off underperforming properties.

Carefully assessing the Property Market Cycle: Commercial real estate, especially in the wake of events like COVID-19, is highly sensitive to market cycles and shifts in demand. For instance, office towers have seen a decline due to the surge in remote work, as companies embrace cost-saving measures and agile working environments. Conversely, the post-COVID resurgence of tourism has driven up demand for hotels and accommodations. In light of these changes, property owners must carefully evaluate the market cycle and prioritise repositioning strategies before selling. However, in the current market, many owners are selling due to challenges such as high bank interest rates, making it difficult for them to keeping their properties.

While considering your exit strategy with underperforming assets, I always recommend finding out the advantages and disadvantages of a 1031 exchange.

Loan structure One of the biggest problems that we normally see is market cycles, and poor loan structures . We have realized that most buyers are unaware of the type of loan. They are inquiring or the options regarding their loan. Regarding market cycles, a person should consider market trends, area, evaluation, and future and current job growth