Everybody has heard that one. It usually follows someone lamenting repeatedly “only if,” or “what if,” repeatedly. Going through annual budget forecasts really is a game of “what if.” Usually the challenges are minor and the variations don’t amount to a great deal. Once in a while a pipe breaks, a roof has a leak, or maybe a tenant gives notice unexpectedly. But those events can be taken into consideration and are really aren’t a big deal when compared to some of the more catastrophic events that could occur.
When forecasting for cashflows in bonding and mortgages in a former life, our discipline called for considering many different scenarios. But for this article let’s just say we have three; best case, base case, and worst case. Base case would be expectation of what is most likely to happen based on your experience, past trends and likely economic conditions. Best case would be maybe a 10% reduction in expenses, a new tenant with a 5% increase in revenue, and a value added long term lease extension. And worse case might be a 25% loss of revenue, the loss of a long term tenant, the loss of a partner, an increase in maintenance cost, and AC goes out! Oh, and COVID.
A worst case scenario by its nature is unplanned. If it was planned it would be in the base case or what you expect to happen under normal circumstances or a slight variation of normal. So you won’t find the worst case in the annual budget forecast. Does it sound like I’m having an argument with myself and losing? Maybe.
But let me ask, do you have a plan for those things that keep you up at night? Right now we’re seeing a shortage of janitorial supplies needed for sanitation and prices are going up. Most buildings are going to different filtration systems for HVAC and adding UV lights. The supply was backlogged for both and the ongoing maintenance cost will be higher. We can assume the supply will be limited for a while and that the prices will continue to rise. That’s just an example.
Most building owners have already seen some tenants struggle. Some have needed help, some have used government assistance, some have been creative, some are holding on by a string, and some are gone. We’re not done yet. The broadcast news and papers are reporting almost daily about another businesses closing. Some are really surprising since they have been around for a long time. And the owners are saying they won’t open again. The question is are you reaching out and being proactive or are you waiting to see if the next shoe to drop hits you? How may hits can you take? When do you get ahead of the curve and protect your income stream by working with tenants and negotiate fair and equitable terms?
Many of the buildings being managed throughout Oregon have multiple owners or the entity that owns the property has multiple members, if for an example, ownership is in an LLC. Each person usually plays an important role and makes a contribution that is relied upon. As time passed each is taken for granted. But what if, God forbid, one of those important persons is taken away or is unable to perform their duties? What if that sage advise you’ve come to count on isn’t available? Maybe it’s the managing member that’s lost or the team dynamic is destroyed with the replacement of a key member. Someone can be designated to take his or her place but are they in the know and ready to perform? Have plans been put in place? Has training been conducted to lessen this risk?
We’ve been humming along on a growing to strong economy for over a decade. In many ways it has been predictable with steady growth and inflation that has been under control. Lending rates have been low. Unfortunately money has not moved throughout the population and that is catching up with us and that is not going to come back easily. Money is not flowing! But COVID is here and it has made some changes that, as property owners, I suggest you consider.
For example, businesses have found new ways to do business and employees like some aspects of it. This may well mean large offices will become smaller, more employees will work at home and the office in a hybrid form. Not just all one or the other. Large central offices and home headquarters will become much smaller and regional headquarters will go away or there will be far fewer. Air travel will be done only when necessary or when it makes economic sense. Teams are forming to do business and change the disciplines as needed based on the tasks. Think the 1950’s but with computers and a bitchin’ network!
I’ve reached out to folks in Portland and am finding that the daily meeting grind is replaced by the weekly staff and organizational meeting. Small online meetings follow. A lot of telecommuting. Some staff have two telephones and two computers. Multi tasking, multi function. The offices of the future need to adapt to compete.
I write about budgets but it is often about so much more. Budgets are about being ready for your best days and worst. About being ready for what keeps you up at night. About the what if’s.
Because, if the frog had wings he wouldn’t keep hitting his butt on the ground!