Turning Around Distressed Properties

Professional real estate managers looking for a challenge and rewarding work would do well to consider adding or expanding their involvement with distressed properties. Opportunities for this work will grow during the long-term recovery from COVID-19. “The next few years will be huge,” says John Hatton, CPM.

No one-size-fits-all solution exists, so the manager role never becomes stale. Each asset is unique, and every aspect of that asset’s operations—including marketing, leasing, staffing, and financing—needs to be reviewed, analyzed, and coordinated with the owner.

All distressed properties share one need, though: a planning process to outline a turnaround. The process includes developing a comprehensive management plan that will address all the challenges in transforming the property into a viable investment for its owners and a valued asset to the community.

The planning process begins with defining the problem or chain of problems.

Developing a Team, Plan, and Process

First, the real estate manager needs to build a multidisciplinary team to address issues related to the property’s construction, operation, marketing, and overall market conditions. This group will also help define actions to achieve the owner’s goals. The team could include architects, contractors, consultants, leasing brokers, and mortgage brokers.

The planning process for the distressed property begins with the manager defining the problem or chain of problems. For example, inadequate cash flow might result from low occupancy. Upon further investigation, the manager might find the low occupancy was due to deferred maintenance, which resulted in poor curb appeal or poor visibility of the property.

During the planning process, the manager will consider questions such as:

• Are the challenges related to physical issues? Are these issues structural, design, or environmental such as asbestos or mold?
• Is a poor tenant mix creating problems?
• How are the amenities and parking at the property?
• Are operational policies and procedures in place and being followed?
• Is the staffing adequate—too many or too few?
• Does the property have a leasing plan?

The next step is tackling owner and financial issues such as lack of operating capital or diversion of cash flow. Then the manager is ready to prioritize issues that will most affect financial stability and meet the owner’s goals. Managers may need to address financial issues by negotiating with the lender for mortgage forbearance or a temporary loan adjustment. This could allow more time to fill vacancies or increase property cash flow so that the property can meet debt service coverage or other lender requirements.

Of course, the economic circumstances accompanying distressed properties are unfortunate. But real estate managers who excel at communicating, working with a diversified team, analyzing problems, and developing game plans can help to improve a property’s performance.

Editor’s Note: This article was adapted from the article “From Struggling to Prospering,” published in the July/August 2021 issue of the Journal of Property Management.