Managing Real Estate Risk to Your Advantage

Introduction To A Series

Every executive knows that managing risk is just part of doing business. But not every executive recognizes the risk inherent in their real estate strategy and tactics. As one of the major components of virtually every enterprise balance sheet, real estate (whether owned or leased) affects every facet of your business, from your supply chain planning to your marketing strategy to employee satisfaction and turnover.

In the current market, you should aggressively pursue any opportunity to lower your occupancy costs. That means that each real estate decision should involve frank, realistic risk analysis — preferably by a real estate expert, and preferably by the experts at Forte Commercial Real Estate (this is our blog, after all).

Real estate risk comes in a variety of forms:

  • Financial risk – This includes the obvious risks such as paying more than you should to rent or upgrade a property, but also decisions that can affect your long-term enterprise value.
  • Flexibility risk – The wrong real estate decision (one that doesn’t precisely align with your business strategy) can tie your hands and limit your options, which in turn can prevent you from pursuing opportunity, expanding to meet market demand, and using your capital in a more effective way.
  • Move and Downtime Risk – Many companies fail to take advantage of a favorable real estate market because they equate moving with excessive operational downtime and want to avoid shutting down during critical periods (such as seasonal peaks in their business cycle).

Unlike other investments where a certain amount of risk is acceptable – even desirable – corporate real estate and risk is rarely a good combination. Risk translates into uncertainty, and uncertainty is the last thing you want in your real estate strategy. And in some instances, doing nothing can be the riskiest alternative in terms of lost opportunity and lower enterprise value.

Over time, we’ll be using this blog to discuss real estate risk. You’ll hear a lot about Forte’s unique take on how to identify risk – and how our approach can help you minimize it. As we look at real estate risk from a variety of angles, you’ll see us repeat several key themes and concepts:

  • Market knowledge– One of the surest strategies to minimize risk is to do your homework so you can make an accurate apples-to-apples comparison of different properties and owner/landlord offers. Comparable leases and sales are helpful data points, but the key is to create actionable alternatives that maximize your leverage and prove the market.
  •  Negotiating leverage – Negotiating without a detailed understanding of your requirements and market realities is the real estate equivalent of walking on thin ice. Having a qualified broker on your side sends the signal that you’re negotiating with a clear understanding of the market and your various options.
  • Timing – When you start your renewal negotiations three months before your lease expiration, your landlord knows that moving is out of the question. The result: you’re at the landlord’s mercy. Planning ahead a year or more from your anticipated move is good business.
  • Flexibility – There’s more to a smart real estate decision than just getting the lowest possible rent. You want to make sure that your decision doesn’t hurt your ability to adapt to changing market opportunity and evolving customer demands.

Even if you’re not in the market for a new property or you’re not facing a lease renewal negotiation in the near future, we think you’ll find our discussion of risk instructive and insightful. And if you’re facing an upcoming real estate decision, we hope that you’ll find these articles helpful – and that you’ll give us the chance to discuss with you how Forte Commercial Real Estate can help you minimize risk and improve your negotiating leverage.

Stay tuned. . . .

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