Expect the Unexpected: Building Resilience into Your CRE?Deals

This article originally appeared on LXKGroup.com.

Think Your CRE Deal Is Bulletproof?

What if your financing falls through at the last minute? What if renovation costs spiral due to hidden structural damage? What if tenants disappear overnight as remote work reshapes demand?

In commercial real estate (CRE), the only constant is change. These aren’t hypotheticals?—?they happen every day to sponsors who didn’t prepare for the unexpected. The fallout can be devastating: failed deals, damaged reputations, and lost investor trust.

As Benjamin Graham, the father of value investing, said:

“The essence of investment management is the management of risks, not the management of returns.”

If you’re not managing risks, you’re leaving your investments exposed.

Let’s break down how to fortify your deals to weather both predictable and unforeseen challenges.

Where Do the Biggest Risks?Lurk?

Most sponsors focus on the obvious risks:

• Financing hurdles
• Construction delays
• Tenant vacancies

These are the fires you see coming. But the real threats are the ones you don’t see until it’s too late:

• Aging Infrastructure: Deferred maintenance or outdated systems can turn a profitable property into a financial sinkhole.
• Market Shifts: Demographic changes, remote work adoption, or shifting tenant demands can destroy your projected cash flow.
• Unrealistic Assumptions: Betting on perpetual rent growth or cap rate compression leaves you vulnerable to market corrections.

According to PwC’s Emerging Trends in Real Estate 2025, macroeconomic uncertainty and aging assets are growing concerns. Deals that looked solid in a low-interest environment are now underwater due to rising costs and market stagnation.

These risks don’t just chip away at your profits?—?they can derail your investment entirely.

Beyond Speculation: The Blueprint for Resilient Deals

Speculative strategies are seductive. The numbers look great in the pro forma, and if everything goes right, the payoff is huge. But when the market shifts, those same deals can fall apart.

Resilient sponsors avoid this trap by grounding their strategies in fundamentals, preparation, and discipline. Here’s your blueprint for building deals that withstand uncertainty.

1. How Can You Be Sure This Deal Will Last 20?Years?

Would you be comfortable holding this asset for 20 years? If not, rethink the deal. Even if you plan to exit sooner, a long-term mindset shields you from short-term volatility.

Action Steps:

• Analyze Historical Data: Review 10–20 years of market trends?—?rent growth, vacancy rates, and asset values.
• Benchmark Your Basis: Compare your entry price to recent sales of similar properties.
• Assess Long-Term Viability: Evaluate infrastructure quality, demographic trends, and potential obsolescence.

What About Emerging Markets?

In fast-growing cities like Nashville, Salt Lake City, Oklahoma City, and Austin, historical data can be unreliable. Instead, study comparable markets like Orlando, Dallas, Phoenix, and Las Vegas. These cities offer a roadmap for how emerging markets mature?—?and what pitfalls to avoid.

2. Are Your Value-Add Strategies Market-Proven?

Adding value doesn’t mean superficial upgrades. Your improvements should increase revenue, reduce expenses, or mitigate risk?—?and be easily recognizable by potential buyers.

Action Steps:

• Conduct Tenant Surveys: Understand tenant needs?—?flexible layouts, upgraded amenities, or energy-efficient systems.
• Prioritize High-Impact Upgrades: Focus on improvements that boost NOI or reduce operating costs (e.g., modern HVAC systems, smart tech).
• Quantify ROI: Estimate costs, potential rent increases, and payback periods.

Sustainability Matters: If only you see the value, the market won’t reward you. Focus on replicable and transferable strategies that a future buyer can appreciate.

3. Have You Stress-Tested Your Assumptions?

A pro forma is just a fantasy until it’s been tested. Stress-testing prepares you for reality.

Action Steps:

• Run Low-Base-High Scenarios:
• Low Scenario: Higher vacancies, lower rents, and increased costs.
• Base Scenario: Realistic expectations.
• High Scenario: Best-case scenario (but don’t rely on it).
• Use Sensitivity Analysis: Build Excel tables to see how changes in cap rates, interest rates, or expenses impact returns.
• Identify Break-Even Points: What’s the minimum occupancy or rent level you need to stay profitable?

According to Deloitte’s 2025 Commercial Real Estate Outlook, 88% of executives expect growth. But in an uncertain interest rate environment, strategic risk management is more critical than ever.

4. Is Your Leverage Strategy Built on Solid?Ground?

Leverage can amplify returns?—?or destroy them. In volatile markets, understanding true market value is essential for managing debt responsibly.

Why Appraisals Aren’t Enough:

• Appraisals are historical snapshots and often cherry-pick data to satisfy banks.
• They rarely reflect real-time market dynamics.

Action Steps:

• Analyze Recent Transactions: Why did comparable properties sell at certain prices?
• Understand Buyer Motivations: Each buyer has different strategies?—?know their story.
• Craft Your Deal’s Narrative: Back your valuation with data and context.

5. Can Your Cash Flow Sustain You Through Market?Cycles?

You can’t eat IRR. While IRR is great for short-term deals, it degrades over time. Consistent cash flow is the lifeblood of resilient investments.

Action Steps:

• Focus on Reliable Income: Ensure cash flow covers expenses, debt service, and reserves.
• Build Repeatable Leasing Systems: Develop marketing and leasing processes that create long-term, stable relationships with high-quality tenants.
• Invest in Tenant Relations: Happy tenants mean fewer vacancies and smoother operations.

Cash flow isn’t just a safety net?—?it’s your foundation for long-term success.

Looking Ahead: Balancing Immediate Action with Strategic Foresight

Balancing daily operations with strategic foresight is the hallmark of a resilient sponsor. Tenant issues, financing, and property management demand your attention today. But without strategic planning, you’re flying blind.

Deloitte’s CRE Outlook and the Global Real Estate Risk Outlook 2024 emphasize that aligning short-term execution with long-term risk management equips firms to thrive through uncertainty.

By developing systems that balance execution with foresight, you ensure every decision today strengthens your resilience for tomorrow.

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