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For real estate firms—and for everyone, really—this budget season is far from typical.
Commercial property managers are having a hard time leasing because of a shift to work-from-home models, recession-related uncertainty and fluctuating interest rates, reports Financial Times. Margins are falling and project approval is tight.
They’re losing out on tenants, revenue—and sometimes—sleep.
Because of dramatic shifts in trends and preferences by both property owners and tenants, real estate finance teams are re-evaluating previously reliable systems to gear up for the budget season.
Our team at Delbridge Solutions has extensive experience consulting real estate firms on their Corporate Performance Management and have helped them navigate several budget seasons. In this blog, I’ll walk you through the budgeting challenges I’ve seen property managers encounter in my time as Co-Founder and COO of Delbridge Solutions (and the strategies we recommend to them).
Property management is uniquely impacted this budgeting season because:
A traditional budgeting approach doesn’t factor in these changing market conditions and relies completely on historical data and budget owners’ insights.
While such an approach held up in the previous seasons, this economic dip requires a non-traditional, scenario-based approach to account for wildly fluctuating variables like interest rates, vacancies, and inflation.
Scenario-based budget planning requires constant involvement of your team and having one source of truth. You need to ask ‘what if?’ every step of the way and have a plan for unforeseen events.
From a modeling and analysis perspective, there is a need to slice and dice the property financials by geography, property type, operators and segments.
It can be overwhelming, but starting early and being keyed in can alleviate a lot of the uncertainty.
Here’s how to get started:
Beyond forecasting rent revenue and operating expenses, scenario-based budgets can help you mitigate financial risks. For example, if you notice that projected revenue from long-term rentals is not enough to meet operating expenses, you can evaluate vacant properties for short-term tenants and increase short-term lease activity.
Scenario-based budgeting can also help you ride out short term challenges with creative solutions. For example, if projected occupancy is low for vacation rentals, property management departments can switch to more aggressive or differently-targeted marketing campaigns to ride out the season.
Unfortunately, most companies are doing this manually in spreadsheets. Or worse, they’re not adopting this kind of agile decision-making at all because they’re too bogged down by manual operations.
Manual budgeting processes are time and labor-intensive. Real estate finance teams have to coordinate with property and leasing account managers and corporate FP&A divisions to gather accurate and consolidated data. Secondly, the process is impossible to repeat—making it a nightmare for scenario planning.
Aside from being time intensive, spreadsheet-only budgeting risks being error-prone. Here’s why:
Commercial real estate owners and operators should look for opportunities to automate as much of their operations as possible, which includes investing in proptech such as digital rent payment tools, advises JP Morgan and Chase. Investing in a Complete Planning Platform is also an instrumental part of eliminating the drawbacks of manual planning.
Today, several people work from home, so collaborating over manual processes requires checking in multiple times a day. But with a complete planning solution like Vena, you can see who’s working on the file and in what context. You can holistically view different tasks in the budgeting process, review and approve data—without creating a single additional version copy.
But not all planning software is created equal, and a solution that integrates with a property manager's existing tools (such as their ERP, property management and HRIS systems) is ideal.
Workflow management, security, centralized data models and integrations are must-haves for scenario based-planning.
Here’s why:
Multiple teams (finance, leasing, property managers, and on-site project managers) need to collaborate and provide input on the budget. So, having a structured and automated workflow makes it easy to assign tasks and enforce deadlines for different divisions. It also gives managers and business leaders accountability and ownership of their data and insights.
Vena, in particular, has an audit trail so inputs are traced to the inputter for accountability. Rather than Finance entering budgets or forecasts, the numbers can become the owners'.
Property management often involves handling sensitive financial data, including property values, rental income, and employee salaries. It's easy to overlook security and compliance when creating multiple budgets. Especially when a manual process involves adding passwords to workbooks or relocating files. A complete planning platform with role-based access controls makes it much easier to maintain security and compliance by providing built in auditability and control over your data.
Data models help you quantify and assess risks like tenant turnover, market fluctuations, and maintenance issues by simulating scenarios under different conditions, helping you allocate resources effectively and mitigate potential challenges.
Complete planning software makes data modeling considerably easier by automatically populating your models with real-time data so you don’t have to painstakingly build everything from scratch in Excel files.
A centralized data model also ensures that all budgeters access a reliable ‘single source or truth’ for their data. This is crucial in an economically uncertain environment; if a property manager needs to create a budget across multiple categories, a centralized repository provides updated lease terms, tenant profiles, occupancy rates, market benchmarks, and rent adjustments.
Integrations are essential for scenario-based planning because budgets can’t exist in silos. You need real-time ‘actuals’ for budgeting projections to be accurate and reliable. Having to go back and forth between your ERP and manual workbooks or budgeting solutions only leads to inefficiencies, confusion and errors.
To navigate this budget season, use data across properties and timelines to create budgets and schedules to meet your financial goals before market fluctuations take hold. A scenario-based budgeting approach isn’t just advisable, it’s essential for remaining profitable today.
For a head-start on rental property projections and budgeting, download our rental property spreadsheet template.
Track, measure and report tenant lease data for multiple properties with this free Rental Property Spreadsheet.
