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News & Insights

What is Real Estate Risk Management?

  • July 22, 2020
News & Insights

What is Real Estate Risk Management?

  • July 22, 2020
The long history of real estate ownership has always involved risk management. But now -- with the onset of the COVID-19 pandemic -- there’s a need to re-examine the critical importance of risk management as it relates to commercial real estate.

The market today is radically different when compared with just a year ago. Who predicted in 2019 that more than 45 million people would apply for unemployment insurance in just a few months? That worries about the federal deficit would be drowned in a sea of emergency spending programs and $1,200 checks? That the Fed would create new and vast facilities to assure marketplace liquidity? Or that wearing masks would be a necessity and not a fashion statement?

What are common real estate risk management strategies?

“Risk management,” said Federal Reserve Chairman Jay Powell last year, “enters our decision making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy.”

For investors and advisors the three central goals of real estate ownership remain unchanged. The objectives are to avoid excess risk, preserve buying power, and increase wealth over time. What’s changed are not the reasons for real estate ownership, but rather the fundamental market forces which have long guided investment decisions.

Let’s look at four proven real estate risk management strategies.

Own where tenants do business 
Tenants tend to build their businesses where the talent is, and lately secondary markets have outperformed. Secondary markets offer employees a lower cost of living while still providing the amenities of a major gateway market. 

Invest in amenities
Amenities are important because they help tenants attract desirable employees, employees who produce, innovate and are central to business growth and development.

Locate near leading universities 
Universities are not just classrooms and laboratories; they’re centers of innovation and new technologies which bring people together and act as incubators that spur new businesses and employ lots of people.

Lifestyle counts 
Successful commercial real estate opportunities can be found outside massive population centers. Think of Austin and Charlotte as well as Raleigh, Portland, and Salt Lake City. What’s the key? Lifestyle. Talented employees are in demand, they can work anywhere, and many prefer to work in smaller markets.

No one would criticize an investor or advisor who used any of these strategies to manage risk. But, go back to Chairman Powell. Think about today’s uncertainties and recent developments. Fundamental ideas are being challenged by new realities.

Developing a real estate risk management policy

The reason to have a risk management policy is to better prepare for a world which is in constant flux. While the approach used can vary among companies and business sectors the basic elements are common to risk management plans.

  1. What are your current concerns?
  2. Is a given risk a material problem or just an irritation?
  3. How are others handling identified risks?
  4. What steps can be taken today to reduce future risk?
  5. What are the results of today’s risk management efforts?
  6. Review and repeat.

How risky is real estate investing compared to the general stock market?

Advisors and investors are always testing the waters, trying to see whether stocks, bonds or real estate are the better investment option at any given time. The answer is complicated by several factors.

First, most investors aren’t buying assets in general. They’re buying specific properties, stocks and bonds based on our understanding of various market factors.

Second, real estate is a localized commodity, the reason why many invest their y’re dollars in some markets more than others. 

Third, as Wall Street tells us, past performance does not guarantee future results. This is the central reason to see risk management in an economic world where markets are frequently shifting.

How do you manage a large portfolio of real estate properties?

The best approach is to have work with a sponsor with localized expertise coupled with an understanding of national trends and requirements. For example, federal tax policies are a national issue while the groundbreaking of an exciting mixed-used development could be a big local opportunity . It’s important for investors to understand the primary opportunities or potential challenges facing an investment opportunity and local expertise is the key to understanding the complex analyses.

To read the latest news and insights from KBS, click here.

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Industry Trends

Underwriting the Perceived Instability of Short-Term Office Leases

  • February 16, 2021
The threat of shorter office lease terms has been looming over the commercial real estate industry for several years. Companies first braced for the potential impact of new standards from the International Accounting Standards Board (IASB) recognizing all leases on the balance sheet, which took effect in January 2019. Then, the office leasing world was hit with additional challenges from COVID-19 as many companies opted to work from home and re-evaluated the role of their physical office space.
Industry Trends Insights

Envisioning the Future of the Built Environment

  • January 29, 2021
Amidst the ongoing crisis, built environments are at the front lines of change and will play a huge role in creating a more resilient world going forward. Office architects are re-envisioning the future of the workplace—where and how we work. Unfortunately, there is no crystal ball to predict exactly what the new future-oriented office will look like, but what we do know is flexibility and adaptability will be key in resilient design.
Industry Trends

Why Texas is becoming a commercial real estate powerhouse

  • January 21, 2021
It looks like 2021 will be another big year for Texas, a year when a lot of major companies will make the jump and move to the Lone Star state. Just look at these transitions:
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