Key Factors for Closing CRE Deals
Coming on the heels of a strong 2021 for commercial real estate (CRE) investment, 2022 is on track to be another robust year for transaction activity. While there is still uncertainty in the real estate industry, the current economic context is poised to favor investors and asset managers that prioritize flexibility and extensive due diligence.
Meanwhile, although industrial assets and multifamily properties will continue to be highly sought after, investors are also expected to turn their attention to emerging opportunities in other niches as well — including office, retail and hospitality, as these markets continue their recovery this year.
However, regardless of asset class, closing CRE deals successfully in the current environment should involve a sharp focus on convenience while also following certain key steps.
Establish a Plan
A comprehensive investment strategy is the cornerstone of a successful transaction. From assessing potential challenges and risks to the actual closing, a thorough plan should cover all of the necessary steps in between, as well as factor in unexpected delays.
While CRE market indicators are on a strong path toward recovery, property owners, operators and asset managers should determine the asset types that align with their portfolio goals. Plus, a flexible approach to prospective investments is important amid ever-changing market dynamics. Likewise, given the pandemic-generated volatility, it’s equally important to have more than one backup plan in place.
Running accurate comparables is crucial when evaluating transaction opportunities. Not only does this enable data-driven decision-making, but it’s also crucial for determining the likelihood of obtaining financing for the deal.
Essential comps to explore include properties situated in locations similar to the targeted asset, as well as the:
- Surrounding area and zoning designation
- Asset and location class
- Lot and building size
- Building status and year built
- Property and lot characteristics
Comps also include valuation methods such as comparing capitalization rates, as well as examining gross income, net operating income, cash flow and cash-on-cash return, among others.
Review Property Financials
Reviewing current leases, along with other relevant documentation for current and past years, is key to assessing the revenue-generating potential of an asset. These financials can include income and expense statements; tax returns; maintenance records; and service contracts.
Notably, digging into current rent rolls represents a vital part of due diligence, considering that the buyer/new owner will be held to existing lease terms. Additionally, it’s important to obtain copies of all leases and proof of payments by way of estoppel certificates.
Forecast a Budget
These projections play an important role in scrutinizing CRE deals, so accuracy is paramount. Plus, renovation or construction costs provide a good understanding of overall expenditures. And, apart from the actual acquisition, these are among the largest expenses in a transaction — and they also affect the size of the potential financing package intended to help close the deal.
Work With Brokers
Enlisting the help of an experienced professional can enhance the process of closing a CRE transaction. That’s because not only can skilled brokers help with understanding the implications of negotiations, but they can also assist in establishing a thorough investment plan, as well as setting realistic deadlines.
Moreover, qualified agents can also help with preparing for the unexpected, factor in any delays and adjust to shifting timelines. They can also leverage their networks and connections to find opportune off-market deals.
Communication throughout the entire process is crucial, as all parties involved must be up-to-date with transaction details and deal status. Specifically, because third-party service providers — such as surveyors, appraisers, contractors, architects, vendors and lenders — are integral to closing a deal, all partners on a project should report in regularly to exchange strategies and lessons that will result in the ideal transaction for both the buyer and the seller.
CRE transaction activity is expected to maintain its momentum this year, and buyers are prepared to invest the capital accumulated throughout the last few quarters. Accordingly, with competition in the investment market slated to remain tight, the industry will favor property owners and asset and portfolio managers who leverage fine-tuned tactics to close successful CRE deals.
Tight competition for industrial space has accelerated deal cycles, prompting operators to emphasize automation and portfolio visibility.