By ICR Real Estate Team
The world’s largest and arguably most important asset class has long been relied upon as a portfolio diversifier, producer of stable income and hedge against inflation. However, the real estate industry finds itself in a precarious position as we hit the end of a cycle marked by rapidly rising interest rates, creating troublesome situations for many owners and operators of commercial property across the country.
In some cases, the largest and most reputable investors have handed the keys on marquee assets back to lenders, while others are convincing lenders to agree to an “extend and pretend” strategy in the hopes that interest rates will drop in the near term, allowing them to refinance at more reasonable rates. Rapidly rising interest rates and historically high inflation have resulted in significant liquidity issues, making it challenging for commercial real estate (CRE) owners to meet debt service and other financial obligations and deliver target returns. These obstacles are exacerbated by the $1.5 trillion in CRE debt due to mature in the next two years, and significantly fewer sources of capital available for refinancing as banks and alternative lenders retrench.
In these situations, the need to communicate effectively with internal and external stakeholders can make a significant difference in how companies are perceived and valued as they navigate this challenging period. As companies contend with the increased challenges of asset managing their portfolios, the need for transparent and thoughtful communication can be overlooked or deprioritized. The additional attention on impacts to investments is not exclusive to investors – the media has been closely monitoring and covering distress in the industry, spotlighting companies that are going through challenging times. This negative attention can lead to deeper and more complicated questions from stakeholders, including employees, partners, investors and prospective buyers or lessors. Over time, this uncertainty can metastasize into meaningful operational challenges and impact an asset’s or a company’s viability.
This creates a critical need for companies facing challenges to take stronger control over their narratives, helping to contextualize challenges and explain steps being taken to navigate difficult situations. Effective communication can help mitigate fallout in an effort to inform how stakeholders perceive an issue and the capabilities of a management team. Done well, proactive communication strategies around sensitive issues and undesired visibility can help calm stakeholder concerns, stem redemption requests, combat misinformation, fill information gaps and ultimately preserve reputational capital.
Managers that have navigated cycles like this in the past are naturally equipped to better handle the macro environment we’re currently facing, and this includes how they communicate. However, the end of the Great Financial Crisis led to the creation of a host of companies built to capitalize on historically low interest rates and a longer-than-expected upcycle. Having never experienced a downcycle, many of these companies – and their investments – are starting to show cracks, and management teams may be less equipped to proactively and effectively communicate about the states of their businesses. However, it is critical that they do so to maintain credibility.
Regardless of pedigree, tenure or size, it is incumbent upon the managers of real estate investment companies to plan for contingencies relating to challenging times. These plans must be centered on communicating the deliberate process they are employing to manage their obstacles and preserve their investors’ capital. It would serve these companies well to engage in scenario planning around the obstacles they face and create a communications playbook for every possible outcome or event, including handing back keys, loan defaults, litigation, capital calls, etc. This would make for a much more actionable situation in the event these challenges do arise, and help them to define narratives on their terms before the information leaks.
How a scenario is framed and when it is conveyed can make all the difference in how information is received. Companies that have not historically engaged with the media may find themselves in unfamiliar territory as reporters begin to poke around and publish stories based on information available on the public record or via anonymous sources with alternative agendas. While the natural reaction among some managers may be not to engage, many don’t understand that specific tactics can be used to influence reporters’ stories behind the scenes without requiring them to go on the record.
These situations present a battle for credibility, and in some cases, survival. Without a comprehensive playbook that focuses on how to communicate, many end up behind the proverbial eight-ball. Getting out in front of difficult situations shows a company is committed to transparency, putting it in a position to navigate a tough market with its reputation intact. An experienced communication advisor with deep industry knowledge can help companies see around corners and execute with precision.
Here are some key things to keep in mind when preparing to communicate effectively during difficult times:
Looking for guidance in today’s challenging CRE environment? Get in touch.
;)