Real Estate Budgeting in the COVID era

It’s fall and that means…. budgeting for 2021! Wait, don’t go.

Budgeting serves several purposes. First, it creates a way to hold management accountable for financial goals and to track progress. Second, it identifies capital needs and sources. Third, it shines a light on financial statements to determine if amounts included are reasonable. Are any amounts significantly higher or lower than expected and if so, why? Most importantly, budgeting creates a road map, ensures profitability, and highlights challenges especially during a recession and pandemic.

Tips when budgeting for 2021 in the COVID era.

Stay informed.

• Above all, stay current on what’s going on with the pandemic, the governments’ responses, and the impacts on areas in which you own properties. Don’t be swayed by national headlines. Instead, keep your focus local.

Budget conservatively.

• Unless you build warehouses for Amazon, now is not the time to be aggressive in your planning and you should budget accordingly. This will, of course, depend on the property type, tenancy, etc.

The Unknown.

• Most of what I read is that we’re in for a long, slow haul out of this COVID recession. However, what if there is another major set-back? A lot is still unknown so have a Plan B budget to pivot to if necessary.

Revenue forecasts

• Think twice about planning for rent bumps, even if they are in your leases. Especially for retail, restaurant, and even apartments. For leases that are rolling, where do you think the market will go? This year is different. You can’t just “add 3% to last year’s rent” and call it good.
• Talk with your tenants. How are they doing? If you’ve agreed to defer rent, will it be collected in 2021? (Let’s hope so!)

Expense assumptions.

• Property taxes. Think taxes might drop as valuations fall? Think again. Valuations for 2021 taxes have been set, so no hope there. However, do watch for assessed valuations next year. They are usually based on the values on January 1st, so if we’re still in this mess come the 1st of the year, values for retail, restaurant, and hotels will likely be lower.
• Insurance. Most, if not all insurance companies have flat-out denied coverage for COVID-related losses, but this is uncharted territory. Make sure to discuss next year’s premium increases with your broker. If carriers start losing these battles, premiums will likely rise.
• Janitorial. Will costs go up from increased cleaning/sanitization? How about go down due to reduced occupancy?
• Utilities. If your property has reduced occupancy and usage, you could see a drop in utility costs.
• HVAC. Will you be upgrading your air filters? If so, how will that impact the efficiency of your HVAC units and the power they will use?

Capital improvements.

• While some construction costs are moderating others are going up. For example, lumber prices are up substantially thanks to home remodeling.
• Cash is king right now, so consider deferring non-essential items such as cosmetic upgrades, new lighting, exterior painting, etc.
• HVAC is a hot topic. Discuss your systems and potential improvements, even filter upgrades, with your property manager. Consider how upgrading might positively impact your tenants’ experience.
• Many company leaders want an office environment their employees can trust coming back to. What will you need to upgrade to meet this need? Touchless everything, more frequent cleaning, upgraded HVAC to bring in fresh air, etc.

Leasing.

• Tenants with leases expiring soon are not in a position to make major changes, so they are willing to kick the can a bit by staying in place. These tenants may want shorter term leases on renewal, willing to trade no or little improvements for it. This may lead to cost savings, vs typical rollover costs while maintaining consistent rent levels.

Funding.

• Paying for major improvements is another matter today. If you don’t have ready cash, dealing with lenders who have their own COVID-related problems may be an issue. It is imperative to be in frequent contact with your bankers in a normal world, more so today. Keep them apprised on your world and keep up on theirs.

To finish on a high note, to me the real value of budgeting are the lessons learned and ideas generated during its preparation. So, stay positive. Use this time to also consider what opportunities you may have to capitalize on this event. I know that is easy to say, but many times we forget to stop and think out of the box.