Why Your Commercial Real Estate Business Is Failing (And How To Improve)

Succeeding as a commercial real estate entrepreneur can be challenging. There are all sorts of complexities and problems that can show up in this particular line of business. If you get it right, it can be highly profitable, but if you get it wrong, you can lose money fast. 

So why is your commercial real estate business failing? And what can you do about it? Here's our take.

High interest rates are reducing your cash flow

One of the biggest challenges that you face as a commercial real estate business owner is high interest rates that reduce your cash flow. Recently, rates have spiked above 5%, which means that debt is much more expensive, and it's hard to recoup costs, especially if you are currently entered into fixed contracts.

Many businesses have a refinancing gap, which means that it's compounding the challenges of elevated delinquency rates with valuations dropping between 20% and 40% in some segments. You can improve this situation by renegotiating your loans early. Lenders often prefer working something out with you before closing. You can also explore sales or partial sales to unlock capital to service debt. Eventually, interest rates will go down, so as long as you can keep the business cash flow positive, you can keep it on track.

Misunderstanding leases

Another problem that many investors and real estate business owners have is that they misunderstand their own leases. While these documents can be complex and dense, it takes time to really go through them and see what they mean. 

You can fix this problem by using services like lease abstraction. You can think of these as a form of CliffsNotes for dense and complex commercial lease agreements, which can often be dozens of pages long. Once you have a better understanding of your leases, you know more about your specific position and the type of leverage that you have in negotiations. You can then use this when dealing with clients who might be challenging.

Skyrocketing office vacancies

Another issue you might be facing right now is the problem of skyrocketing office vacancies. Because of hybrid work, more people are working remotely and only coming into the office two or three days a week. That means companies no longer need the vast amount of square footage they required before.

The best way to get around this is to invest in amenity-rich Class A office upgrades where you offer flexible spaces and complete packages on a monthly rolling basis. This business model is doing extremely well in the commercial office space, even if traditional leases are falling behind. If you can reuse your existing portfolio by converting portions of it to mixed-use or residential, that can also help you be less reliant on conventional commercial leases to produce the cash flow you need.

Poor market timing 

Finally, you could find yourself in trouble if you time the market poorly. Many investors get into specific niches when there's over supply; therefore, always conduct rigorous data-driven due diligence.