November 2021

by Vanessa Vaughn Mathews, Founder, Asfalis Advisors

[originally published on Asfalis Advisors; written by Colin Garrison based on interview with Vanessa Vaughan Mathews]

Few industries have been hit with as many difficult new challenges over the past year and a half as the real estate investment trust (REIT) sector.

Amid continuing uncertainty in the office and retail real estate markets, REITs have had to grapple with challenges arising from the COVID pandemic and a fast-changing regulatory landscape with regard to mask mandates and sanitation requirements. REITs have also been impacted by the supply chain crunch, labor shortage, extreme weather, and civil unrest.

This article looks at the four main challenges faced by REITs today from the business continuity perspective. It also suggests approaches for successfully managing each one.

The information is most relevant to retail REITs, the area where my company, Asfalis Advisors, has the most experience. The challenges and solutions for other types of REITs may be different.

The four main challenges faced by REITs today are: determining where to locate their facilities and how to design them, communicating with tenants, protecting assets, and obtaining quality intelligence to enable effective decision-making.

These challenges pose significant threats to REITs as they strive to sustain their businesses and maintain a strong relationship with tenants. Fortunately, there are steps REIT managers can take to successfully manage each one, thereby improving their resiliency and protecting their businesses.

SITE LOCATION AND USE OF SPACE

One of the major challenges confronting REITs today is where to locate their facilities and how to design and utilize them. The pandemic has driven an emerging preference for retail REIT centers to be in more walkable, community-oriented settings. A growing number of consumers have come to prefer curbside pickups and contactless shopping and payment options. The pandemic has also compelled property owners to make changes in such areas as ventilation, signage, and parking lot layouts.

Office REITs have been affected by many of these issues as well as by uncertainty about capacity needs as clients shift between remote, hybrid, and in-person business models.

COVID-19 will eventually recede but public health experts say global trends will bring more pandemics in the future, possibly ones more serious than COVID-19. Aware of this, potential tenants will be evaluating REIT properties with the health of their employees and customers at top of mind.

How can REIT managers avoid being impacted by these changes and uncertainties? By staying informed, being flexible, and being responsive. REIT managers need to stay abreast of tenant and consumer needs and preferences with regard to how properties are designed and set up. They need to stay informed about public health dangers, mandates, and recommendations and site and design their properties accordingly.

REIT managers who locate and manage their facilities with their tenants’ public health needs and concerns in mind will most likely continue to do well. REITs with facilities that do not address these concerns will suffer.

COMMUNICATING WITH TENANTS

Another significant challenge facing REITs today is that of communicating effectively with their tenants. Due to the unstable nature of the current environment, such communication has never been more important.

Public health crises, supply-chain product delays, transportation problems, labor shortages, vaccine-related challenges, cybercrime, civil unrest, extreme weather, and natural disasters are just some of the problems facing REIT managers and their tenants today.

At the same time, many REIT managers admit—and many tenants complain—that communication between landlords and tenants is often inconsistent and incomplete. In recent years, this has been especially prominent in terms of REIT managers’ response to the pandemic and instances of civil unrest. Often, tenants have not been informed of what the REIT will do or has done about these issues, or who they can go to with concerns about them.

REITs that allow such a situation to persist are putting themselves at risk of losing tenants and reducing demand for their properties.

REIT managers must recognize that having a productive relationship with their tenants is critical to the success of their business model.

Traditionally, a major value add of REITs has been having “boots on the ground” relationships with their tenants. REITs should leverage this strength, working closely with general managers at the local level to learn and address their needs and concerns.

REITs should also ensure their communication with tenants is clear and consistent from the local, regional, and corporate levels.

The following are two examples of how REIT managers can communicate transparently with their tenants:

  • For pandemic sanitation, devise a cleaning protocol that meets or exceeds local requirements, share information about it with the tenant, and faithfully carry it out.
  • For political demonstrations, provide tenants with immediate information on planned protests, share what safety and security resources are in place, and discuss contingencies in case situations escalate at key locations. 

By establishing good communication with their tenants, REIT managers can forestall problems, keep their tenants satisfied, and protect their businesses.

PROTECTING ASSETS

The third challenge facing REITs is that of protecting their assets.

The past two years have brought a pandemic, conflicts over masking and vaccinations, extreme weather, wildfires, heightened cyberattacks, and increased civil unrest. These all pose threats to REITs’ assets.

Some threats are obvious, such as when hurricanes damage property. Some are less so, such as when the threat of civil unrest requires REITs to board up store windows, reducing their appeal to shoppers. All of these threats have the potential to impact the bottom line for REITs.

What can REITs do in this environment to protect their assets?

REITs’ responsibility is typically from the windows and front door out. REIT managers need to catalog their assets (e.g., buildings, parking lots, cameras), determine who in the business owns them, and figure out what resources they have to protect them. They should strive to align these resources with the assets they’re trying to protect.

Success in protecting assets is highly dependent on relationships. REIT managers should develop partnerships around the security issue with their tenants, local law enforcement, other companies, and third-party security vendors. Such relationships can bring important intelligence ahead of time and provide help to call on during emergencies.

OBTAINING QUALITY INTELLIGENCE

The last of the major challenges facing REITs today is that of obtaining quality intelligence for use in making decisions.

Recent events have made obtaining accurate, pertinent information about the business environment more important than ever. Good information is critical to managing all of the threats previously discussed, from the pandemic to extreme weather to supply-chain problems to civil unrest. However, many REIT managers are finding it difficult to obtain reliable information.

In many cases, this is due to the fact that issues are complex and fast-moving. An example is pandemic-related regulations and requirements, which have been in flux, with many differences between different localities and levels of government. In some cases, confusion arises from the fact that information has become a battleground. Sometimes managers get their information from inaccurate gossip online.

Basing decisions on misinformation can cost a company a great deal. REITs that are not in compliance with health regulations can be fined. Failure to stay informed on other topics can lead to a REIT’s being blindsided by costly events such as fires, civil unrest, or cyberattacks.

REIT managers need to recognize the importance of obtaining quality, objective information. They should make it a habit to gather news and information from multiple, reputable sources (such as the New York Times, Washington Post, and the leading business journals), local and national outlets, and across multiple media (e.g., print and television). They might also consider getting information from sources such as the National Retail Federation or the Retail Industry Leaders Association.

REITs can also obtain business intelligence from third-party vendors; for example, Asfalis Advisors provides clients with information sourced from contacts at the U.S. Department of Homeland Security, FEMA, and the CDC, among other agencies.

Obtaining quality business intelligence can be difficult. REITs that successfully meet this challenge will have a better, fuller picture of reality—leading to better decisions, higher competitiveness, and greater resilience.

REMAINING COMPETITIVE

Over the past year and a half, threats such as the pandemic, extreme weather, and a rise in civil unrest have caused unprecedented challenges for real estate investment trusts. The most prominent of these are determining site locations and use of space, communicating with tenants, protecting assets, and obtaining quality intelligence.

REITs that ignore these challenges risk seeing their properties become unattractive to tenants, undermining their resilience and jeopardizing their business. REITs that meet these challenges successfully will raise their chances of remaining competitive and resilient even in an unstable world.