In the heart of a bustling city, a 20-story office building stands half-empty, its food court eerily quiet. Just blocks away, a newly constructed apartment complex boasts a waitlist of eager tenants. This stark contrast isn't unique to one location – it's the new normal in real estate markets across the nation.
In a recent episode of the Best Metrics podcast, host Glenn Dunlap discussed this dilemma in-depth. He interviewed Kenya Brooks, a CPA with 25 years of experience in real estate accounting. She started as a project accountant and now serves as a corporate accounting leader and partner at Savile CPAs and Advisors.
Dunlap and Brooks explored key financial indicators and trends in the real estate market to help accountants understand and navigate today's complex environment.
Ask for a Trailing 12-Month P&L
Brooks emphasizes the importance of looking beyond surface-level numbers to identify trends and patterns that tell the true story of a property's performance.
"I want to see a month-over-month comparison," Brooks explained. This approach allows financial professionals to spot seasonal fluctuations and identify potential issues like utility bills, repairs, and maintenance. For instance, a property manager might notice that repair costs spike every winter, prompting a proactive maintenance strategy to mitigate these recurring expenses.
However, monthly comparisons are just the starting point. Brooks advises, "Ask for a trailing 12," highlighting the value of a longer-term perspective in smoothing out short-term fluctuations and revealing genuine trends. This approach is particularly valuable in today's volatile market, where short-term disruptions might mask longer-term patterns.
Multifamily Boom, Commercial Bust
The current real estate market presents a tale of two sectors: a thriving multifamily segment and a struggling commercial sector. Brooks paints a clear picture of this dichotomy: "Multifamily is increasing. Vacancy rates are very, very low. On the flip side, office building occupancy is terrible."
Brooks notes, "I don't even know how people are affording to lease right now, but that's where the money is." This boom is reflected in the surge of multifamily construction across cities.
However, property managers face significant challenges even in this robust market. Critical expenses like labor, insurance, and property taxes have grown substantially. Brooks says, "If you follow the insurance trends, you'll see they're finally starting to come down a bit. But they exploded over the last couple of years."
The commercial real estate sector, particularly office spaces, tells a different story. The shift to remote work, accelerated by the pandemic, has left many office buildings empty.
This low occupancy is having ripple effects beyond just the property owners. Brooks explains, "I knew it was bad when the McDonald's closed. If a McDonald's can't survive, it's not looking good." This illustrates how the downturn in commercial real estate can impact entire local economies.
Commercial property owners are adopting various strategies to adapt. Some are exploring multi-functional spaces that can be easily converted for different uses. Others are considering more drastic measures. Brooks reveals, "We're seeing clients who were major real estate movers and shakers for years and years letting their buildings go into bankruptcy."
Adapting Financial Strategies in Challenging Times
The current real estate market demands a significant shift in financial strategies. Brooks highlights a dramatic change in lending practices: "It used to be you might come to a bank with about $5 million in equity, and you might get a loan for $50 million. Now you're coming with $30 million in equity and barely getting $30 million from the bank."
This shift necessitates a more proactive approach to financial management. Brooks emphasized the importance of staying on top of collections and payables: "We're looking at cash. How's your cash flowing? Are you bringing in the amount of money to cover your debt and your usual expenses?"
In challenging times, the role of financial advisors becomes even more critical. The increased engagement allows for more timely adjustments to financial strategies, ensuring that real estate professionals can respond quickly to market changes.
Tax strategies also play a crucial role. Brooks mentioned that cost segregation studies remain valuable tools, especially when acquiring new assets. These studies involve identifying and reclassifying personal property assets to shorten the depreciation time for taxation purposes, which can significantly improve cash flow.
However, Brooks cautions against focusing solely on short-term fixes. She stresses the importance of balancing immediate financial concerns with long-term market positioning. She says, "You can't wait until you're in the middle of something to try to make a change."
Success in today's rapidly evolving real estate market hinges on interpreting and acting upon key financial indicators across diverse property types and economic conditions. Kenya Brooks's insights in this Best Metrics podcast episode illuminate the path forward for savvy professionals navigating this complex landscape.
As remote work reshapes office demand and housing preferences evolve, financial professionals equipped with these insights will play a pivotal role in shaping the future of our built environment.
For instance, a financial advisor might use these insights to help clients with diverse real estate portfolios. They could advise on reallocating resources from struggling commercial properties to thriving multifamily developments while implementing proactive financial management strategies to weather market fluctuations.
To enhance your ability to guide clients through these challenging times, listen to the full episode of the Best Metrics podcast featuring Kenya Brooks.