You're assessing success in Commercial Real Estate. Which key performance indicators should you focus on?

The missing KPI here is, of course, track record. To assess the likelihood of success in commercial real estate, look at the experience of the sponsor. They have likely been through at least one major downturn (the only way to really learn how to invest in real estate), have a long term perspective, take on low leverage, fix rates on debt (unless there's a good reason not to), and can tell war stories of deals gone bad. And they know that the right way to make money in real estate is to make money slowly.

The Length of Lease Agreements Says a Lot About a Property in CRE In the commercial real estate (CRE) industry, it's not just the rental rates compared to similar properties that matter. The duration of existing and future lease agreements is crucial for success. Longer lease terms often indicate stability and tenant satisfaction, which can enhance the property's value. Moreover, investors and landlords favor properties with long-term leases as they offer predictable income streams and lower vacancy risks. Thus, assessing both the current and future lease lengths can provide significant insights into the quality and potential of a commercial property.

One of my first clients had a mixed-use property with fluctuating rental income. By closely monitoring changes in rental rates and comparing them with market trends, we identified an opportunity to increase rents after making targeted property improvements. This approach not only boosted their income but also positioned the property more competitively in the market.

In other words, NOI represents the property's ability to generate income from its operations after covering all operating expenses but before accounting for taxes, interest, depreciation, and amortization, providing a clear picture of how efficiently the property is being managed. By evaluating the NOI, you can not only assess success but also identify deficiencies in operations, which can guide you in optimizing it through strategies such as adjusting rents, adding new income sources, and controlling expenses.

In another instance, I worked with a client considering the purchase of a retail property with a high cap rate. While the potential returns were appealing, I advised them to consider the associated risks carefully. We delved into the property's history, tenant stability, and market conditions, ensuring the investment aligned with their long-term goals. This experience reinforced the value of understanding cap rates in context rather than just chasing high returns.

There are so many KPIs you could use. From a pure investment standpoint, I always look towards Cash on Cash and Equity Multiple. You can easily compare one investment versus another without being easily manipulated. I do not like IRR for the opposite reason...it can be easily manipulated. Now, one other question to ask yourself is, 'Is the juice worth the squeeze?' Meaning, does the return come from a super heavy lift (stress, energy, hours), or is it an easier lift? That can make a difference.

One challenging project involved a property with a marginal DSCR, raising concerns about its ability to cover debt obligations. We re-evaluated the property's financials and made adjustments to improve its NOI, which in turn boosted the DSCR. This proactive approach not only stabilized the property’s finances but also made it more attractive to lenders, securing better financing terms for future investments.