As the pandemic demonstrates its resilience, refusing to quit and go away, what does that mean for the future of current equity ownership of urban commercial real estate that was built upon the thesis of managing utilization by crowds of people on a daily basis? Covid-19 is a vicious accelerator of creative destruction of equity in commercial real estate. For some equity, it’s a poison, while for others, it’s an elixir of youth. How do you know if you will thrive, survive, have to sell, pray for forbearance, or walk away? The answer can be determined by using a simple five-point rating system Corion developed to quantify the value proposition of a property and the investment health of the equity.
In the aftermath of the GFC, different asset classes exhibited very different performance. As distressed property resolutions advisors, Corion assisted owners and lenders in working through their challenges and helped many survive and thrive despite dire short-term circumstances. Using a proprietary rating system that evaluates prospective property performance across three different sectors with six factors in each, for a total of 18 data points, the value proposition of virtually any property, regardless of size, type or location can be qualitatively measured. Intuitively simple and easy to use, the model could generate highly accurate (+/- 5%) results in 24-48 hours for smaller assets and within a week for larger ones. Its application for portfolio optimization and equity preservation is significant.
While the model uses a 1 -5 scale (1 being best and 5 worst), we will turn it around here for the sake of making a point and providing clear and thoughtful guidance on the best way to profitably protect and preserve an owner’s equity in a property. It is particularly germane with the Covid-19 crisis, compared to the GFC, because there is now a new set of parameters revolving around health and wellness that must be factored into the analytics. The model was prescient to the current crisis in factoring in both operating expenses and capital expenditures into the evaluation of the investment thesis for the property. Regardless of property type, both operating costs and capital expenditures to modernize older properties are seeing significant increases compared to pre-Covid. Tenants no longer want to rent “spaces”, they want to rent “experiences”. When you bake in the costs that will be necessary to deliver the high quality tenant experiences owners will need to achieve a reliable and sustainable value proposition for their tenants, a great many properties are going to need so much new equity that the existing equity is worthless. In many cases (such as a one or two), the property should be demolished to make way for the next generation use.
If income is to equity as water is to a fruit tree, in a recession (drought), survival is the first order of business. Culling the orchard is key to equity preservation when there are limited resources.
The Corion Property Evaluation Model offers guidance on what and where to trim:
If a five, equity will thrive (there are very few fives) – Keep (unless it’s time to harvest)
If a four, equity needs more - hold and upgrade
If a three, equity should be set free – sell or recapitalize
If a two, equity solutions are few - negotiate with lender to buy time
If a one, equity is done – walk away
Interested in learning more about the model and how you can benefit from it?