Duck And Cover: AppFolio Panelists Share Best Practices To Make It Through Today’s CRE Challenges

With interest rates and inflation rising, people naturally have many questions about how to ride out the current economy.

To find answers, AppFolio convened a panel of commercial real estate pros in October at its annual Customer Conference in Santa Barbara, California. 

Representing four different CRE asset classes — retail, multifamily, office and self-storage — the group counseled the live audience to be patient and think long-term, avoid becoming overleveraged and communicate continuously. That last point came up often because the panelists were acutely aware of how nervous investors are today. 

“You absolutely have to stay in front of your investors,” said panelist Heath Binder, a senior vice president with shopping center operator LBX Investments. “You have to communicate with them about what you're seeing in the market. You need to figure out what their concerns are, and then address those concerns.”

Host Quincy Oswald, AppFolio director of client onboarding services, opened the session by asking panelists how rising interest rates were impacting their business.

“It definitely affects [us] when we're underwriting deals — it's just another layer of complexity,” said Jennifer Phister, controller for HJH Investments, whose portfolio is more than half represented by office properties. “It minimizes the amount of returns available and it directly cuts into your profit and what you could return to investors.”

Other panelists predicted that the economic turbulence could last for another couple of years or more. It likely will have the harshest impact on CRE players who are too deeply in debt.

“It’s going to be a very interesting next couple of years,” Binder said. “It'll be painful for a lot of people if you're overextended, and there's so many operators out there that are overextended.”

Oswald asked his panelists if they saw any silver lining or opportunities in the CRE market. Preston Gillion, fund manager at Store Space Self Storage, said the current environment provides opportunities for growth in his sector.

“We try to find smaller operators that are overleveraged or just not able to stabilize their current facility,” he said. “We'll try and buy them, specifically in tertiary and primary markets. Top 20 metropolitan statistical area rankings typically tend to be more added-value deals, provide higher returns and are more predictable and stable for our investors, and they tend to like that.”

Binder recalled some advice he once received, which redefined the Golden Rule as “he who has the gold makes the rules.”

“People who have access to capital over the next few years are going to be feasting,” he said. “If you’ve got money and are smart with your investment strategy, you're going to be able to accumulate assets at probably really attractive price points. For good operators — and it doesn't matter what sector you're in — if you know how to add value and the metrics make sense, you're going to do great.”

But with the currently high level of uncertainty in CRE, AppFolio’s guest speakers recommended being open and honest with investors to address their concerns — and to not try to “put lipstick on a pig,” as Phister put it.  

Some panelists noted they were enhancing their communications with clients. Morris Groberman, principal with Northwest Commercial Real Estate Investments, said his longtime practice of sharing monthly reports with his multifamily investors is more important than ever.

“Giving people access to the information they want about the buildings [means] I don't get as many phone calls and concerns because they can look at their monthly reports,” Groberman said. “They can see the cash flow, what the building's doing and why or why not it’s doing well. I think transparency and reporting are going to be critical, because [investors] want to be kept up to date now.”

AppFolio’s Oswald asked the group how hybrid work and other workforce trends were impacting their businesses. 

Gillion said his company has had trouble finding managers for its self-storage spaces. As a result, Store Space Self Storage has adopted fully automated check-in kiosks, which he said has saved his company “a ton of money.” 

“We're a self-storage company first, but we're trying to become a tech company,” Gillion added.

Phister said HJH Investments has responded to changing office needs by subdividing some once-large office spaces into smaller spaces to accommodate today’s hybrid workers.

She cited an example of one tenant that downsized its office space from approximately 45K SF to 16K SF, which she said the tenant feels is “more than enough” to accommodate its hybrid workforce.

Such trends prompted Groberman to quip: “I learned very young that friends don't let friends buy office buildings. That's why I'm in multifamily.”

Binder said a business’s “flexibility and cushion” will be key to its success in the next couple of years.

“Just be moderate with your leverage,” he said. “It's the guys who overleverage, pay too much, have really aggressive assumptions and do all the things that we're taught not to do across all the sectors who have the biggest problems. We've been through multiple cycles as a company, and we try to make sure that we're prepared for our worst day with that cushion.”

This article was produced in collaboration between AppFolio and Studio B. Bisnow news staff was not involved in the production of this content.

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