Managing distressed properties Can be rewarding for a dedicated and professional real estate manager who seeks a challenge. No one-size-fits-all solution exists, so the manager's 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.
One aspect that all distressed properties have in common is the planning process necessary to turn them around. A distressed property requires a comprehensive management plan that will address all the challenges inherent in transforming the property into a viable investment for its owners and a valued asset to the community.
What is a distressed property?
Distressed properties often result from a downturn in the real estate market or an economic recession. One example is the 2008-2009 financial crisis. "There was an oversupply of product," Richard Forsyth, CPM, CCIM, explains. "Leasing activity declined. Developers and investors couldn't meet their debt obligations, which led to lender foreclosures--and receivership business for property management professionals."
Even when the economy is thriving, there are other reasons that a property can be classified as distressed. Overbuilding can still prevent some properties from achieving lease-up projections, and they may become nonconforming with the parameters of their financing agreements. This could result in the buildings becoming distressed properties, with a risk of takeover by their lenders.
Properties also become distressed when they are developed in neighborhoods with insufficient demand, the wrong demographics to support them, or when the property's design does not meet the needs of the intended users. Developers will often use the land they own to develop buildings because of easy access to financing, rather than because of validated demand for the proposed improvements and diligent rental surveys.
Some distressed properties have inherent flaws in their original product concepts or designs. For example, an office building in an up-and-coming neighborhood may have the wrong size floor plates, a shopping center may be in a location with poor visibility, or a multifamily property may have only studio and one-bedroom units in a multigenerational neighborhood. An asset that was properly designed for the market when developed can become obsolete as users' needs and preferences change and new trends and amenities are introduced.
Properties that are neglected and poorly maintained, with excessive deferred maintenance, or those where customer service to their tenants/residents is considered a low priority, will lose their ability to compete in the market. "Sometimes owners get in a situation where deferred maintenance was much more than anticipated," Forsyth says, "causing the property to become distressed."
Assets can also become distressed when the property has a large debt service and experiences difficulty in making loan payments, with the NOI declining due to drops in rental rates and/or unexpected vacancies. "Properties can become distressed by being either over- or under-leveraged," Forsyth adds.