The 2021 CRE Budgeting Playbook – How to Forecast When the Textbook is Thrown Out the Window
Working on the next year’s budget is always a time when data and well-honed intuition go hand in hand. As a property or asset manager in commercial real estate you probably already have your tried-and-true playbook when it comes to planning an upcoming year’s budget: looking at history, working with analysts to understand trends and multipliers, checking in with tenants. But as we all know, 2020 was not a regular year. 2021 will not be a textbook year either, which means we need to look for solutions beyond the playbook when planning and budgeting for it.
Understand the Credit Loss per Property
Forecasting, projecting or predicting – all of these future-forward actions require a deep foundation of understanding the present. While in the past much of that understanding came from analyzing trends and data from the past, this year CRE professionals will need to rely more heavily on the present and near-past, going more in-depth when looking at both micro and macro economics. Here are a few key topics to analyze, and our favorite resources for them.
Now it’s time to look at specific tenants one by one.
- Collect financial reports and compare them to previous years. Analyze the trends and understand the tenant’s financial stability.
- Check tenants’ credit scores. Credit rating companies can provide detailed reports on the spending trend and ethics of your tenants. Recommended resource: Equifax.
- Don’t rely solely on brand name and internal reports. Create a Google alert with your tenant’s company name and monitor the financial news.
A Wide Lens on CRE Risk
Take a look at the macro economics and look beyond your property into the wider scope of area, industry and more. Then, build your budget from the bottom up by verifying the risk affecting each of your tenants.
- Check the unemployment rates in your property’s area. Recommended resource: Bloomberg Data
- Learn how COVID-19 has impacted the area: virus spread, economic impact and commercial real estate impact. Recommended resource: Moody’s.
- How have the industry salaries changed? What are the trends in job change? Recommended resource: BLS Public Data, S&P, Glassdoor
Adjust Your Operational Expenses
Forecasting your expenses is a crucial part of planning your annual budget. Adjust your expected operational expenses to fit the the assumptions about tenants returning to the office:
- Make sure to have the latest information about tenants returning to work, and pay attention to the differences per location and industry. Recommended resource: JLL’s re-entry office survey
- Adjust the operational expenses of the property and the entire portfolio according to office re-entry assumptions
- Optimize and personalize your reaction to tenant requests
How are you preparing for 2021? Comment or email us with your favorite resources for risk research, assessment and management. If you are working on your 2021 budget forecast and find it tedious to calculate risk tenant by tenant, we are happy to offer you a free demo including an overview of financial risk factors.