Developing Proactive Portfolio Management

For companies with a large portfolio of leased properties, the post-pandemic, shifting workplace policies and changing consumer preferences are putting pressure on location and facility decisions. Historically, there was greater stability of corporate properties as own vs. lease decisions were made prior to occupancy. Companies renewed most leases greater than 85% of the time and there were predictable patterns among workers and customers. Since 2020, that stability has shifted dramatically.

Almost every commercial property sector — office, industrial and retail — has seen a change in fundamentals. For office space, “leased” vacancy rates are still in the 15% to 17% range, but physical occupancy is in the 40% to 50% range with hybrid and work from home accommodations now being the norm rather than the exception. The early signs of mortgage defaults for major office properties have appeared, prompting discussions around conversion of CBD office assets to residential use in many major cities.

With the explosion of e-commerce and consumer demand for same day or overnight shipment of goods, the demand for large scale and last mile distribution centers created a spike in development costs and rental rates. While that trend seems to have peaked in some markets, vacancy rates remain in the low single digits while rental rates and demand remain strong.

New and better data management has created the opportunity for businesses to proactively manage their property portfolio, aligning it with the changing business needs rather than just expiration dates.

The retail sector had a head start on re-making the marketplace as many large-scale indoor malls have been recast as lifestyle and town centers over the last ten years. Entertainment, convenience, and healthcare facilities have replaced many traditional retail stores. Some mall locations have converted to fulillment and distribution centers, while others have been able to monetize their oversized parking areas to support under parked, industrial and logistics locations nearby.

The real estate industry has always been a cyclical business and for many, this is just the latest cycle. However, there are a few foundational shifts that are changing the way companies think about managing their portfolios. Tenants and Landlords have traditionally managed their portfolios based on upcoming lease expirations. Renewal options and notice dates were relatively easy to track and with enough lead time, the decision to renew or not was relatively prescriptive. New and better data management has created the opportunity for businesses to proactively manage their property portfolio aligning it with the changing business needs rather than just expiration dates.

The new Lease Accounting Standards amplified the need for conscious decision making and reporting across all industries. With information and change management process in place, forward thinking companies are beginning to recognize that the information can have much more value across the organization than simply accounting compliance. With shifts in the workplace dynamics and customer preferences, companies are building broader data sets including not only lease information, but integrating HR, space management, non-rent expenses, furniture, and equipment costs. They are also taking advantage of available market data on alternative spaces, comparable costs, and Landlord financial health to gain a more holistic view for planning and decision making.

In this dynamic market, and armed with better information, a proactive approach to managing transactions is both possible and necessary. Many Landlords have a complex set of assets, financing, and tenants. Change in circumstances is happening more quickly and what seemed stable last month may change dramatically by next month. This environment lends itself to a “win/win” approach to negotiations more so than previous cycles. This shift in strategy, approach and negotiations requires reliable information, experienced negotiators, and patience for the right outcome.

For Tenants, space consolidation, upgrading locations, redesigning workplaces, and reducing overall expenses can be benefits that need not wait for coordinated expirations. For Landlords, stabilizing rent rolls, getting longer term lease commitments, even for less space, or replacing struggling occupiers with stronger credit tenants are all benefits to engaging early with their tenant base. The elements may not always align for all parties, but the purpose of this approach is to initiate engagement and discussions to help solve each other’s challenges for greater mutual benefit. When it works, the benefits are significant. In this dynamic market, the chance for success is heightened.

Jackson Cross Partners has teamed with industry leading technology partners to build and maintain advanced information systems while also developing best practices and tools to gather and report the key data elements and metrics to support the transaction management process. With over 20 years of experience and results utilizing these proactive strategies, JCP and our partners are ready to help client companies meet the latest challenges.

For more information on Proactive Portfolio Management, contact: Zachary Forrest Executive Director – Client Services and Brendan Quinn Director – Business Development.