Back to Basics to Stay Strong In Commercial Real Estate. A point of view by GE Capital Real Estate's Ron Pressman.

By Ron Pressman
As published in Estates Gazette, July 11, 2009

Protecting assets, adapting to a new partnership climate and engaging the government key to success

To succeed in this difficult real estate market, investors and managers need a new kind of toolbox. While financial implements are still critical, more traditional tools of the trade – such as a hammer; paintbrush and the number of a good plumber – have joined them.

As the sector experiences one of the worst downturns in decades, property investors and managers are reconsidering their strategies for success. Many have embraced a back–to–basics approach that provides a path for staying strong in a difficult economy. Key to this is active maintenance of their properties.

Gone are the days when making a profit in real estate involved a financial transaction and little else. Now, professionals are focusing on 1) protecting and enhancing the value of their assets; 2) adapting to a changed investment climate; 3) reallocating precious resources; and 4) persuading the government to provide the sector with crucial supports.

It is likely that a combination of these strategies will yield success. To be sure; a meaningful recovery is not imminent, but a growing number of companies are lining up to take advantage of the turnaround when it comes.

A renewed emphasis

A severe lack of financial liquidity, resulting in a squeeze on sales, makes this market different from previous ones. Therefore, the only way to generate value is to preserve the quality of the portfolio, minimize losses and outperform on a management level.

In fact, despite this time of stretched budgets, there is a renewed emphasis on capital expenditure, with tenants being attracted to buildings that can be improved.

Organizations are also adapting to the different conditions by encouraging more flexible work practices and realigning their resources.

Investors are seeking a different type of partner – one who has the ability to protect, manage and improve an asset as the need arises. Moreover, they want a partner with a proven track record and expertise

For example, they are shifting people from less active areas, such as origination and deals, to asset management positions, which can have an immediate impact on business.

Perhaps equally importantly, the back to basics approach is being seen in a
Much-altered investor. Driving the changes are both the experience of investors – many of whom incurred losses in general real estate and private equity funds – and a critical lack of capital. Investors are being much more careful and opting to invest in groups rather than as individuals.

A disciplined approach

Overall, the marketplace is characterized by a more disciplined approach and stricter underwriting practices. This is in marked contrast to pre–recession times, when an apparently–limitless supply of capital encouraged some investors to continue doing deals, despite falling returns.

Investors are also seeking a different type of partner – one who has the ability to protect, manage and improve an asset as the need arises. Moreover, they want a partner with a proven track record and expertise. There is a growing understanding in the industry that many financial players do not have the knowledge and experience to proactively manage properties.

Here in the US, leading real estate executives are working with the Treasury and other organizations to address what they say is a gap in the government's efforts – help for a challenged commercial property market.

Their goal is to convince officials that a meaningful recovery is unlikely without a significant step up in government action. They argue that a majority of the market – perhaps as much as two thirds – is not affected by current initiatives in the banking, automotive and residential property sectors.

Our approach at GE Capital has always been "basic". It is based on a prudent investment philosophy, risk management and a deep knowledge of the industry. This has helped us adjust to market transitions in the past.

Our first objective is to manage our property portfolio to achieve the greatest value. In this way, we hope to stay strong and position ourselves for a brighter tomorrow.

Ron Pressman is president and chief executive officer of GE Capital Real Estate, based at the company's global headquarters in Norwalk, USA