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In commercial real estate, distressed assets are defined as those commercial properties that are mismanaged, struggling to navigate changing market conditions, have negative cash flow due to reduced leasing activity post pandemic, and generally underperform the market. These factors, more obvious in light of the current economic and social realities facing commercial real estate are creating a challenging environment for many owners, resulting in an increase in the number of distressed properties.
Property management for distressed assets is typically a last resort for the financial partners supporting these assets. With owners unable to fulfil their financial obligations to the lender, the lender is forced to take a legal action facilitating foreclosure, resulting in the transfer of the property to the lending institution. While not adverse to investing in a solid plan to reposition and build value in the real estate, the lenders look for a real estate savvy partner to carefully manage the property.
Managing distressed commercial property can be a challenge, even for the most experienced management company. Whether it’s due to economic downturns, neglect, or other factors, these situations present unique hurdles that demand specialized strategies to navigate successfully. In this blog, we look at the intricacies, explore the challenges, and reveal some of the strategies and best practices involved in revitalizing these properties.
Understanding Distressed Property
In a recent article in Fortune Magazine it was stated that, “The value of distressed US commercial real estate neared $80 billion in the third quarter, its highest level in a decade.” Before delving into the intricacies of managing distressed assets, it’s important to know what you’re up against. These assets typically exhibit signs of neglect, financial instability, and/or operational inefficiencies. This presents itself in a number of ways, including:
Specific Challenges of Managing Distressed Real Estate
Managing distressed property comes with a number of unique challenges. Some of the most obvious hurdles they will encounter include:
Strategies for Successful Property Management
Despite these challenges, strategic management practices remain the cornerstone that can support revitalization efforts. As previously mentioned, lending partners are interested in strategies that build the value of the asset. Repositioning, leasing, tenant retention, and maintenance plans will typically be funded. The first steps for a property manager may include:
Conclusion
Managing distressed commercial property demands a strategic approach, resilience, and creativity. By understanding the unique challenges these properties present and implementing targeted management strategies, skilled property managers can revitalize distressed assets and unlock their potential for all stakeholders.