The commercial real estate landscape is undergoing a major change. Gone are the days of chasing the next big deal. Instead, the future belongs to those who master the art of asset management. Amid this dynamic environment, asset, debt and equity (ADE) managers have emerged as pivotal figures, actively shaping the industry’s future. This industry transformation introduces various challenges and opportunities for lenders, borrowers and mortgage originators, prompting a comprehensive reassessment of their roles and strategies. This includes challenges for stakeholders navigating today’s dynamic environment. It also, however, unlocks opportunities for those who adapt and empower their asset managers.
“Amid this dynamic environment, asset, debt and equity (ADE) managers have emerged as pivotal figures, actively shaping the industry’s future.”
Redefining operating landscapes
In 2023, the commercial real estate sector suffered a major downturn, marked by a considerable decline in sales volume and total transactions. According to data from the Mortgage Bankers Association (MBA), total commercial and multifamily mortgage borrowing and lending dropped to an estimated $444 billion last year. That is a 45% decline from 2022, which saw total activity of $804 billion. The volume in 2023 was the lowest level of activity in a decade.
The MBA reported that the level of commercial and multifamily lending and borrowing was essentially unchanged in the first quarter of 2024 compared to a year earlier. The difference being that this year originations dropped significantly in retail, healthcare, office space and hospitality, but were up for industrial properties.
The CoStar Group reported that New York City, the largest U.S. commercial property market, saw property sales fall by 53% in the first quarter of 2023 when compared to fourth quarter of 2022. The sales represented the most substantial pullback in the New York market since 2009. Some observers have referred to commercial real estate lending as being nearly “frozen,” due to soaring bond yields, uncertainty about property values and lenders pulling back. However, CoStar reports there was an increase in office sales activity in the early months of 2024, leaving some people hopeful that the office sector valuations and activity level could soon reach a bottom.
For the time being it appears that the era of blockbuster acquisitions that once dominated the headlines has given way to a new focus on strategic asset management, a comprehensive approach to managing a company’s assets to maximize value and performance. The rising interest rates and tighter lending conditions have subdued the traditional acquisition fervor. In its place is a landscape where asset management and value optimization is taking center stage.
Managing performance
Due to the scarcity of viable acquisition opportunities in commercial real estate, asset management has transformed into a revenue and portfolio optimization driver. The conventional growth model through acquisitions faces challenges when interest rates and the bid-ask spread — the difference between what the buyer is willing to pay, and the seller is willing to accept — make many deals impractical.
Organizations are increasingly recognizing the untapped potential within their existing portfolio of assets, giving rise to the prominence of asset, debt and equity managers in navigating this transition. The push to improve a company’s work efficiency and streamline costs to boost profitability is nothing new. The economic environment, however, is forcing borrowers and lenders to put greater emphasis on evaluating ways to minimize expenses and maximize revenues.
Fortunately, growth is still abundantly possible by looking at operational data and benchmarks to identify the potential to improve performance — without expanding through buying assets. One way this can be done is by simplifying operational procedures and focusing product ranges.
The renewed importance on managing a company’s assets, debt and equity signifies a forward-looking stance. Companies need to position asset management as a dynamic force for long-term success. Adopting a holistic approach allows for management to harness expertise in debt and equity markets and maximize the value of existing assets.
This type of management extends beyond traditional corporate metrics, emphasizing the broader impact on portfolio performance, tenant satisfaction and the creation value. In a climate characterized by market volatility and economic uncertainties, correctly managing ADE emerges as a guardian of long-term value creation, ensuring portfolio resilience and performance.
The emphasis on performance rather than expansion also positions operators for future success in acquisitions when markets reach equilibrium. Lenders will take notice of a company that can show a stronger financial position and a track record of margin growth during a difficult market recalibration.
Shifting focus
This paradigm shift carries a variety of implications for lenders, borrowers and mortgage originators. Lenders must shift their focus from solely evaluating asset acquisition to prioritizing ongoing asset management performance. This necessitates adapting risk assessment models to include long-term property value enhancement considerations. Lenders must emphasize a borrower’s capacity to manage asset performance, recognizing its pivotal role in the evolving landscape of commercial real estate.
For borrowers, shifts in loan approval criteria will place a heightened emphasis on effective asset management capabilities. The evolving scenario underscores the increased importance of developing and presenting operational and strategic plans to ensure sustained property value. Furthermore, borrowers need to engage in ongoing collaboration with lenders, actively demonstrating asset performance and value creation to align with the changing expectations of the industry.
Mortgage originators will be required to increase their role as intermediaries, aligning their services with the changing needs of both borrowers and lenders. As they position themselves as trusted advisers, mortgage originators must provide comprehensive guidance on asset management, financing options and strategic partnerships. This evolution reflects the dynamic nature of the industry and the importance of adapting to new models in asset management.
Strategic actions
The shift from acquisitions to asset management necessitates a more strategic approach. Stakeholders can effectively position themselves for sustained growth and resilience by emphasizing innovative methods and fostering collaborative partnerships.
Lenders will have to invest in technology, including adopting advanced data analytics capabilities for assessing operational metrics and predicting portfolio performance. They also should incentivize borrowers to focus on value creation and operational key performance indicators, which are quantifiable measurements used to gauge a company’s overall long-term performance, such as return on investment, profit margin, total revenue and more. Another important initiative is to forge meaningful connections with asset managers to gain insights into the evolving needs of borrowers and explore co-investment opportunities for mutual benefit.
Borrowers should embrace the model and give managers overseeing assets, debt and equity the necessary resources and authority to execute strategies. Borrowers also must implement agile management practices to respond swiftly to market changes. On the technology front, they need to embrace innovative data analytics and technology for operational improvements and tenant management strategies.
They can leverage benchmarking to prioritize operational improvements based on identified performance gaps and track progress toward industry best practices. Implementing robust benchmarking practices enables stakeholders to identify areas for improvement, optimize resource allocation, and demonstrate value creation. Creating deep relationships with lenders and brokers who understand and align with the asset management vision is another important initiative. This will give companies the chance to collaborate on research and development initiatives for industry-wide advancement.
Mortgage originators will have to position themselves as trusted advisers on these matters. They should go beyond traditional brokerage roles and offer holistic guidance on asset management, financing options and strategic partnerships. They, too, should leverage data and technology by utilizing sophisticated analytics to identify performance-enhancing opportunities for borrowers and match them with suitable lenders. Implementing these strategic actions is imperative for sustained success in a market increasingly focused on optimized asset management.
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The recent emphasis on managing debt and equity, with a focus on strategic asset management marks a turning point for the commercial real estate industry, ushering in a new era of dynamic growth and enduring value. Embracing this shift allows lenders, borrowers and originators to unlock the hidden potential within their portfolios, navigate market uncertainties with greater resilience and forge collaborative partnerships that will help fuel sustainable success. This is not just an adaptation to changing times but a proactive leap toward a future where agility, data-driven insights and a shared vision for value creation pave the way for a more robust and thriving commercial real estate landscape.
