Real estate investments are active investments. That means, after the purchase, the property must be properly managed and monitored or you risk eroding the value of the asset — and any ROI.
Owners, of course, can choose to manage their own real estate properties. However, for many, engaging a real estate asset management firm is an option that works better for their lifestyle and financial goals.
In this article, we’ll outline three ways asset managers can help improve net operating income (NOI) and cash flow by focusing on revenue, expenses, and capital decisions that directly affect investment performance.
What is asset management in real estate?
Before we go into the role of an asset manager, we’ll briefly explain what asset management is and how it differs from property management.
Real estate asset management is the active, strategic oversight of a real estate investment on behalf of its owners. It involves actively monitoring performance, managing risk, and helping implement and make recommended changes to the property’s business plan that preserve and enhance value over the life of the asset.
While asset management and property management work closely together, they serve different purposes. Property managers focus on the day-to-day operations of a building, including tenant relations, maintenance, and rent collection. With that context, the distinction between asset management and property management becomes clearer. One role focuses on execution at the property level; the other focuses on performance at the investment level.
Cash flow improvement strategies through asset management
Every asset has its own unique set of challenges, strengths, and risks. A real estate asset manager is uniquely positioned to help improve the cash flow of real estate investments in three primary ways.
#1 Optimize rental revenue
Optimizing rental income is paramount to maintaining and generating property cash flows. On the surface, it’s a simple concept: negotiate a favorable lease. However, commercial real estate leases are complex agreements with a variety of nuances and structures, requiring specialized knowledge to achieve strong, stable revenue.
If executed properly, the lease can work in an owner’s favor to attract quality tenants, achieve better rental rates, and reduce vacancies — all helping to maximize rental income for the asset and improve net cash flow.
Asset managers can assist with:
- Leasing – Source commercial tenants and conduct tenant interviews.
- Lease negotiation – Help structure lease agreements to attract quality, creditworthy tenants to improve the stability of rental income.
- Lease expirations – Anticipate upcoming vacancy by monitoring rent rolls, communicating directly with tenants, and monitoring tenant sales. This allows owners to be proactive about filling an upcoming vacancy rather than reacting to an unexpected one. Vacancies must be avoided to maintain strong cash flow, so asset managers help mitigate tenant rollover risk by strategically staggering lease expirations and negotiating lease extensions.
- Market research – Leverage a deep understanding of the rental market, including rental rates, tenant concessions, and vacancy rates at competing properties. This information can help owners structure lease terms in line with market benchmarks.
#2 Minimize operating expenses
To complement revenue optimization efforts, asset managers also work to minimize operating expenses and capital expenditures for a property. They can reduce expenses by assisting with:
- Budgeting – Work with the property manager to prepare annual budgets founded on market intelligence and actual historical performance.
- Variance analysis – Periodically analyzing historical budget-to-actual variances to better understand which operating expenses are negatively impacting investment performance.
- Negotiating owner-friendly leases – Structure lease agreements to limit the owner’s day-to-day responsibilities and shift maintenance and capital expense responsibilities to the tenant, which can shield owners from annual operating cost increases and costly capital repairs.
- Efficient capital allocation – Prioritize capital expenditures to minimize operating expenses and other surprise costs. This can be accomplished by making strategic capital improvements that reduce ongoing expenses or by scheduling regular maintenance of capital items to help avoid costly emergency repairs or replacements.
- Appealing real estate taxes – Monitor assessment cycles and recommend tax appeals before a property reassessment results in large real estate tax increases. Real estate taxes and insurance are two of the most substantial operating expenses. An asset manager understands the operating expenses that can potentially cripple both an investor’s NOI and cash flow after debt service (CFADS). They have the resources and knowledge to effectively appeal real estate tax increases and identify insurance savings, potentially resulting in material savings for investors.
- Service provider RFPs – Manage the request for proposals (RFP) process for service providers to encourage competitive pricing. They can also plan for periodic rebidding of the property’s service providers to reduce costs for needed services.
#3 Monitor capital markets
An understanding of interest rate trends, available debt and equity capital, and transaction activity in the market helps confirm that investments are capitalized appropriately to optimize cash flow and enable exit flexibility. Monitoring these constantly changing market dynamics can be challenging and time-consuming for owners. Asset managers work in these markets frequently and possess the market knowledge to understand past real estate trends and better forecast upcoming asset needs.
Real estate asset managers can assist with:
- Capital stack development – Monitor capital markets to determine an optimal capital stack for a real estate investment to help maximize risk-adjusted returns.
- Property-level financial projections – Use forecasting tools to understand the optimal timing for refinancing debt. Understanding when it may be time to refinance can substantially improve an investor’s cash flow.
- Debt covenants and maturities – Perform the scheduled covenant testing required by commercial real estate lenders, monitor debt maturity schedules, and formulate a plan to maximize returns for properties with near-term debt maturities.
- Sourcing capital – Tap into their network to conduct broad market searches, uncovering competitive financing options to bring investors optimal loan terms. They can also negotiate favorable loan terms based on the specific needs of owners and the asset
- Efficient closing – Offer hands-on management through the mortgage banking process, assisting with the loan documentation and the closing process.
Conclusion
Real estate investing is complex and requires active oversight in a market that requires significant specialized knowledge and market awareness. Asset managers are a resource to help ownership navigate these challenges. Through a strategic lens, they help owners formulate and execute business plans with the goals of optimizing income, lowering operating expenses, maximizing value, and mitigating risk to the owner.
If you’re thinking about acquiring a commercial building for investment purposes, our real estate asset managers can help. Give us a call today.
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Opinions expressed in this article are current as of the date of this article, and are subject to change at any time.
Plante Moran Realpoint Investment Advisors publishes this content to convey general information about our services. Investments and strategies mentioned herein may not be appropriate for you. Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain. You should consult a representative from Plante Moran Realpoint Investment Advisors for advice regarding your own situation.
