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Capital Planning

2017 Is Not the Time to Underspend on CRE Capital Budgets

At first glance it could seem as though underspending a commercial real estate portfolio budget is a good idea. After all, it seems to make sense to save dollars today; but, as many leaders in the industry know, failing to deploy budgets allocated for capital projects actually results in longer-term growth inhibition. Leading commercial real estate services firm JLL reports that 72 percent of Forbes 1000 companies underspend on their portfolios, limiting future growth.

These are some of the specific reasons that you should not underspend on your capital budgets this year:

You Must Stay On Track With Tenant Improvements

In an environment with dynamic technological innovations, especially in the office and multifamily verticals, tenants demand and expect certain amenities such as free Wi-Fi, upscale lobbies that can hold small conferences, and spaces that can provide room for contract workers and recreation. Today more than ever it’s imperative to make sure those needs are met.

Creative office and lifestyle-curated common spaces are just a few of the examples that are becoming essentials. The Commercial Real Estate Finance Council (CREFC) says that tenant-improvement loan-backed securities (TIBS) are an efficient way to get execute these endeavors, and also stresses the importance of keeping spaces maintained for tenants.

Your Efforts Guarantee Longer-Term Returns

In a research report on capital spend, JLL points out that not allocating sufficient capital can also hurt a company’s bottom line. Even successful corporations are underspending. Fortune 1000 companies “miss their capital plan targets for office real estate alone by $12.2 billion annually,” with the firms under spending by $8.8 billion, the brokerage outfit says. The JLL report says that companies undershoot their real estate budgets by 25 percent or more. Those underspent funds might seem like they look good on paper as saved money, but companies allocated that spend specifically for building improvements which would have brought in a more significant ROI in the future, including the ability for owners to improve asset value and collect higher rents.

Foreign Investment Is Something You Need to Anticipate

Due to economic instability overseas, such as the Brexit uncertainty, there is an increasing appetite for commercial real estate in the United States. The country is seen as a safe haven for putting money into trophy assets. Whether it be New York City, San Francisco, or a market on the rebound that could have good returns, it’s considered to have more reliable returns than several other countries.

The Association of Foreign Investors in Real Estate (AFIRE) says that 95 percent of the companies it recently surveyed plan to either increase or maintain their U.S. investments. The stakes are high because AFIRE members reportedly have a total of $2 trillion in global commercial real estate holdings. In order to make properties more attractive to these types of investors, and keep the momentum going, it’s better to put your best foot forward, so to speak, and make sure the assets are in the best marketable condition.

Use Technology to Defeat the “Capital Monster”

There can obviously be a lot at stake when a firm underspends, potentially damaging the value of a commercial real estate portfolio. JLL refers to this scenario as the “Capital Monster,” and the company has some solutions for its defeat. Technology is a major key. Firms can “leverage best-in-class data and analytical platforms,” or hire a vendor, to get a more transparent handle on construction and project management, as well as capital planning.

 

Sara Shank, Beacon Capital Partners CTA

 

Peter O'Brien

Written by Peter O'Brien

Peter O'Brien is the Director of Business Development for Honest Buildings. He specializes in working with real estate owners owners to create operational efficiencies though technology.