It’s Time to Reevaluate Your CRE Portfolio

Many markets have been thrashing in volatility—look at headlines about equities and Treasury securities. For better or for worse, commercial real estate hasn’t been immune to market changes. This means investors, owners, and developers should reconsider how and when to review their portfolios.

Ups and downs

The highs and lows stand next to one another. For the first time since the worst of the pandemic, retailers abandoned more store space than they began occupying. Reportedly, more than 8,700 store closures included the liquidation of such national chains as Party City and Big Lots.

And yet, other areas of retail have made strides. Smaller coffee chains have successfully challenged Starbucks. Aldi plans to add at least 225 stores in 2025 and a total of 800 by the end of 2028.

In office, which faces a battering across the country, some metro areas have achieved availability significantly lower than national averages. The same is true for hotels and multifamily. There are even cities where some neighborhoods are challenged, and others are excelling.

Types of change

Although it can be more “in your eye” at times, as the ancient Greek philosopher Heraclitus said, “Change is the only constant in life.” In CRE, change can be positive or negative, whether in market valuation, tenant performance or ownership and can happen anywhere at any time. Disruption, pleasing or not, can be a national force or a local quirk.

Fabric and craft retailer Joann Fabrics is in the process of permanent closure, with landlords facing the need to replace the tenants in all the company’s stores. Sycamore Partners is acquiring Walgreens Boots Alliance, which had planned to close some underperforming locations. But the change in ownership and control might also mean acceleration of store rationalization. JCPenney and CVS have said they will also close some stores.

Smart responses

Some changes will delight owners, investors and developers. Others will make them wary. Still more might make some sweat. To be prosperous in CRE, know when and how to respond.

You don’t want to change your portfolio frequently. That’s a sign of the inadvisable practice of timing markets. However, you need to take appropriate action when necessary. To that end, take some planning time and determine your review triggers. There might be ones for national trends in the product types you favor. Others could be for conditions at your properties and for local news and regulatory hearings.

Reexamine your underwriting process so it is ready for future responses. Document your goals: a primary NOI focus, a desire to control certain blocks of properties, asset development for future sales, something else or a combination of any number of goals. Include your risk tolerance for different goals, property types or capital stacks to set potential parameters and boundaries. Don’t forget to look at changes for their potential to deliver opportunities that may not be obvious at first.

With review triggers and underwriting guidelines in place, you can then decide on the appropriate action. Perhaps you increase investment in the property or additional ones. You might decide to decrease investment, maybe pulling the trigger early to head off a rush you expect might build. It could be that changing a tenant could solve a problem. Possibly rebalance your portfolio allocation. Or, ultimately, it might be to do nothing at all.

Whatever the situation, remaining vigilant, having well-defined review triggers, keeping underwriting standards current and efficiently planning tactics to support the business strategy will support your goals and help you navigate the constancy of change.

Jonathan Hipp is principal for U.S. Capital Markets & head of the U.S. Net Lease Group at Avison Young.