Commercial real estate professionals know that lease management is the bedrock of the CRE industry. While foundations tend to be thought of as the more stable part of a home or construct, the lease management industry is constantly evolving to accommodate internal variables such as updates in lease accounting standards as well as external factors such as macro-economic influences including demographics shifts and inflation. While uncontrollable, these externalities have played a big part in how CRE professionals operate and negotiate lease terms and options.
Of these externalities, inflation may be the wrench that is gumming up the machinery most. Inflation erodes purchasing power and creates a growing litany of leasing concerns. This adds a new layer of complexity when it comes to managing commercial assets. Let’s consider how inflation can affect the future of lease management.
Read more: The Future of Lease Management in an Inflation-Driven MarketHow Inflation Can Impact Lease Management
Inflation must be at the forefront of thought when it comes to how CRE professionals leverage and manage properties. The most obvious concerns for those professionals and their tenants are increased operational costs and uncertainty in the future valuation of a property. These issues are generally linked to rising rents or renegotiated pricing when a lease is renewed.
A rent increase is often designed as a safeguard for landlords. It’s the natural mechanic of passing through those higher costs to the tenant. This, in turn, has a domino-effect as those tenants must then consider increasing their own prices in order to take on that additional expense. This can often create occupancy issues as a tenant might realize that this new outflow could exceed their own potential for revenue growth.
This means that those higher costs could cause tenants to reconsider their location, downsize or even exit the market altogether. The inflation domino effect can quickly lead to a decrease in occupancy rate for landlords.
Inflationary factors are most important to consider for long-term lease commitments. During periods of volatile inflation, a long-term lease is risky for both parties. As a result, landlords often bait the proverbial hook with more agreeable short-term options as well as other provisions that will help secure occupancy while volatile market conditions sustain.
Inflation can also affect lease management as a result of asset valuation. Rapidly growing property value will have a direct impact on the value of your portfolio which could quickly impact lease negotiations and your overall investment strategy. This could force an asset manager to reconsider immediate and future holdings as they’re in an environment of uncertainties.
How Can You Protect the Future of Lease Management?
Great innovation and transformation come with every lesson learned. Inflation is nothing new. The Fed has a target inflation rate of 2% as measured by CPI. Recent accelerated inflation is also not unprecedented. Commercial real estate professionals must gather their understanding of inflation today, where they think it’ll be years from now and make decisions based on this. To accomplish this feat, we’ve seen a number of recent trends that are reshaping the future of lease management.
1. Automation is Key
In the past 10 years or so, lease management has found a whole new digital gear. Thanks to advancements in technology, you can now automate the tracking of lease terms and escalations. You will also be reminded of critical dates for not just one but all of your lease agreements. Predictive models can also help you to more effectively understand current and future market trends, tenant behaviors and any potential risk to your existing or future portfolio. Automation can be a great weapon against inflation as it will help to minimize the potential for costly human error, inefficiency or miscommunication.
2. Flexible Leasing Plans
Lease agreements, especially long-term agreements, are directly affected by inflation projections. Rigid, point-by-point agreements often lack the adaptivity that is called for during times of economic uncertainty. That’s why the recommendation is to consider lease management provisions for early termination, renegotiation and renewals.
3. Sustainability Initiatives Can Combat Rising Utilities
Another way to combat operational expenses is to mitigate those ever-rising utility costs. More and more CRE professionals are adopting green tech such as solar in order to curb monthly expenses. While the tech or products themselves becomes an added expense, this can be countered by a number of additional benefits which typically include federal tax credits and locking in a cost that is more certain than energy-cost speculation.
4. Be the Landlord You Would Want
Another innovative thought is to create and sustain a landlord-tenant dynamic that is celebrated and not just tolerated. More often than not, satisfied tenants would prefer to shelter in place during inflationary periods and just ride out that proverbial storm. An adversarial relationship will have the opposite effect so consider how to provide for a more amicable relationship with your tenants. One way to do that is to make sure that your lease management software supports nurturing these tenant relationships.
Get Your Tech More Involved
Cloud-based lease management software is far more robust these days, and it’s a crucial weapon when it comes to fighting inflation. As mentioned, automation is a big part of what makes today’s applications so relevant. However, when you are properly armed with the right application you can also…
- Streamline compliance with ASC 842 and IFRS 16
- Prepare modeling to better understand inflation risk analyses
- Integrate with real-time market data and financials for more accurate reporting
The future of lease management software also means that you will have deeper insights into market direction and a more accurate sense of predictive lease modeling. Smart contracts are also nearing the norm. A smart contract enhances transparency while it also eliminates the need for intermediaries. Smart contracts are a technological innovation that can help you reduce costs and minimize your exposure to risk.
Make Yourself Less Vulnerable in an Inflation-Driven Future
Navigating inflationary waters means you will need to up your lease management game. CRE pros must learn to adopt proactive measures that will help to balance those new costs with cost-cutting initiatives. Lease managers will also need to be more flexible when it comes to accepting tenant terms and concerns as they, too, will be deep in the inflationary fight.
The future of lease management will be determined by your ability to adapt, innovate and sustain genuine partnerships with your short and long-term tenants. There is always something to learn from each economic challenge, so let the past success and failures drive you to more successful decision making.
It’s during these more trying times that modernization and reform find a true gear. Innovation rarely happens absent volatility. Comfort is not the mother of invention. We all know that formula relies on necessity and difficult times.
To summarize, organizations that are ready to invest in state-of-the-art automation and embrace flexible lease options while nurturing strong tenant relationships will be more rooted and able to endure difficult economic downturns. The future of lease management will lead managers beyond the administrative functions of today. It will be essential for lease managers to anticipate economic trends while leveraging technology and sustaining long-term stakeholder interest.
If inflation and its effects on your operations as a commercial real estate professional have been on your mind then you’re in the right place.
Our innovative lease management platform came to be by our founder John Rice who had the experience and instincts to know that there had to be a more effective way to take full advantage of cloud-based technologies. John became an expert and keynote speaker in the field out of that necessity and he would love to share those results with you. We feel this personal connection to both John and the rest of our talented staff is one of the many benefits that sets Quarem apart.
Your free demo of his industry-leading software is just a click away.
