Archives for June 2023

Across the U.S., apartment investors who paying floating-rate construction or bridge loans are now struggling to keep up with interest payments that have often doubled. New permanent financing may help, but permanent lenders rarely offer enough to fully pay off a property’s existing loan.

Help may be on the way. Private equity investors are eagerly lining “rescue capital” for these properties—but there’s a catch.

Rescue capital—often offered as preferred equity—is structured as a loan with its own high interest rates. Even properties with strong income from rents can only support so much debt, and the proceeds from a permanent loan and preferred equity still typically fall short. If they want to keep their properties, that means many borrowers will simply have to contribute more equity.

“I’m in the middle of the deal right now where a client is bringing about $1 million to the table to pay down a loan and that’s cash out of his pocket,” says Matthew Dzbanek, a capital services professional at Ariel Property Advisors.

The borrowers who feel the squeeze the most took out floating-rate, short-term debt just before rates began to rise, when high-leverage capital was easily available and valuations of apartment properties were at their peak. Many of those loans are set to come due in the second half of 2023 and early 2024—and fatigued lenders are unlikely to offer extensions.

“Those are all starting to come due in the latter half of this year and the beginning of next year—so you’re really just starting to see the beginnings of borrowers acting to get out of those deals,” says Kyle Draeger, a senior managing director for CBRE Multifamily.

ACRE provides a bridge in Savannah

ACRE, a private equity fund manager based in New York City, raised $400 million for its Fund IV, which is ready to provide preferred equity loans to apartment properties that need to fill gaps in their financing.

“We’ve got a lot of fresh powder,” says Michael Van Der Poel, founding partner of ACRE. Its discretionary, closed-end, fund welcomed wealth managers, registered investment advisors and high-net worth individuals among its investors, targeting yields for these investors from 15% to 18%.

Many apartment projects that received bridge financing or construction loans at the peak of the market in 2021 may need this rescue capital in the second half of 2023 and early 2024. “They’re going to struggle to find permanent financing because the valuation has changed, because they had interest pile up, because of all those problems,” says Van Der Poel.

ACRE is also already providing rescue capital for apartment developments that may provide a template for future preferred equity investments, even though these deals were stressed by a different set of problems during the coronavirus pandemic. They suffered months or even years of delays during the lockdowns and the shortage of workers and materials that followed.

Near the end of 2022, one of ACRE’s developer clients began to welcome tenants to a new, 150-unit, mid-rise building in Savanah, Ga. Work began on the project in 2019 and finished near the end 2022. “The project was a success, the leasing is going well,” says Van Der Poel. “There really no problem except that the construction loan is coming to the end of its term and the banks are not really excited to give anyone more money right now.”

ACRE provided a $25 million bridge loan to the property. ACRE’s bridge loans have interest rates floating 300 to 400 basis points over the Secured Overnight Financing Rate (SOFR). Since SOFR has risen sharply in the last year, the Savanah property cannot support as much debt as it once did. Its original construction loan was roughly $30 million.

To refinance with a new bridge loan, the owners had to contribute about $5 million of their own equity. “If you have capitalized borrowers, it’s going to be very difficult to for people to walk away from that operationally sound underlying property and not put a little put in $5 million,” says Van Der Poel. But less well-capitalized borrower may have more serious problems. “It’s gonna be a tale of two borrowers,” he says.

The preferred equity not taken

The story of one mid-rise apartment building in Chicago shows just how difficult it can be to bring rescue capital to a property.

“This is a highly complicated, negotiated structure,” says Ben Kadish, president and founder of Maverick Commercial Mortgage, Inc., based in Chicago.

One of Kadish’ clients owns (for now) a new, 40-unit building over-burdened by debt. A little more than two years before, the owner took out a $7.5 million floating-rate bridge loan. It covered 75 percent of the projected value of the property, based in its $500,000 annual income from rents. The interest-only loan had floating interest rate of roughly 4 percent. That works out to just $300,000 a year in mortgage payments.

“The property was making $200,000 a year in cash flow,” says Kadish.

All that changed when interest rates rose, driving the floating rate on the loan above 8 percent. Its mortgage payments doubled to more than $600,000. “That’s more than the building generates in rent,” says Kadish. Most bank lenders ask borrowers to maintain a debt service coverage ratios of at least 1.25x. “You have to find replacement financing to keep your properties.”

The hunt for new financing started with a new, permanent Freddie Mac or Fannie Mae loan. With an interest rate fixed at 5.5 to 6.0 percent, such a loan might cover 65 or 70 percent of the value of the building—much less than the amount of the existing bridge loan, which had covered 75 percent of the value, says Kadish.

Rescue capital from a preferred equity lender could fill part of the gap. But not all of it. Maverick identified four different small-balance, preferred equity lenders that quoted interest rates from 13 to 17 percent,” says Kadish. But the size of these loans was not enough to cover the amount needed by the borrowers.

Maverick spent six weeks fitting together different combinations of loans in an attempt to increase the total amount of loan proceeds, because different agency lenders have different underwriting criteria.

“The borrowers would have needed to bring another $1.2 million, on top of the preferred equity, on top of the new permanent loan,” says Kadish. Instead, the borrowers decided to put their property on the market for sale. “They decided to sell the building rather than write a check themselves.”

Kairos rescues 900 apartments

Kairos Investment Management Company, a real estate investment company based in Irvine, Calif., has already provided rescue capital to apartment investors in trouble.

Twelve months ago, Kairos provides $30 million to a portfolio of three garden apartment communities in suburban Philadelphia. Each has about 300 apartments, for a total of 900 units.

The owner of these properties had initially taken out a two-year bridge loan to pay for a value-added renovation, with options to extend. The aggressive loan covered 90 percent of the cost of the project. However, the coronavirus pandemic interrupted their plans. Lockdowns and the scarcity of workers and materials delayed the renovations and added new costs.

“The thing got delayed and they were out of their debt coverage ratio covenant,” says Carl Chang, founder and CEO of Kairos. “They got to the end of their two years and they couldn’t get their year extension because the numbers were no longer working.”

Kairos provided $30 million in preferred equity, with an effective interest rate of 18 percent. The funds paid down some of the existing construction loan, reduce the debt service owed by the property. “We got the extension done and they had enough capital now to complete the improvements,” says Chang. Rents improved, and recently the stabilized property was able to secure new permanent financing.

Having Kairos as partner helped the borrower achieve their goals in other ways than just the infusion of capital. Permanent lenders have toughened their underwriting standards over the last year of chaos on the capital markets. That includes the financial resources of loan sponsors.  “We have big balance sheets so we help bring credibility with the agency lenders,” says Chang.

By completing deals like these, Kairos is able to target yields around 18 percent for its investors in its funds.

ANAX rescues stalled developments in NYC

ANAX Real Estate Partners plans to provide $200 million in rescue capital over the next 18 months to apartment properties in New York City that need an infusion of capital. Several large, private equity funds have entrusted ANAX with these millions. ANAX, itself an experienced developer, has identified a pipeline of about a half-dozen potential investments so far and has already issued three letters of intent.

Each of the properties that ANAX has considered so far is a partially-built multifamily development that no longer has enough capital to finish construction. In some cases construction has stopped entirely, and ANAX is working with at least one construction lender who seized an unfinished building.

These cases may be more extreme than the budget gaps apartment owners face in other parts of the country. However, they are similar in that in many cases, apartment owners have realized the value of their properties have changed as interest rates rose – taking some of their equity with it.

“In many cases, if you can get 50 percent of your equity back, isn’t that a win?,” says Eric Brody, founder and principal of ANAX, based in New York City. “We realized that with the way that the interest rates went up, I don’t care what the net operating income was, it did not cover the higher interest rate.”

Source: “Rescue Capital Lines Up for Opportunities on Multifamily Properties“

More than 1,200 leaders from around North America gathered to hear updates and projections for commercial real estate’s hottest sector at NAIOP’s I.CON East industrial real estate conference in Jersey City, N.J.

The sessions kicked off with an economic forecast from Dana M. Peterson, chief economist and center leader, economy, strategy & finance, The Conference Board.

“We’ve been modeling for the U.S. to enter recession this quarter for the last year now,” she said. She explained what a recession would look like, emerging economic trends, and their implications for industrial real estate.

“The Conference Board’s Leading Economic Indicator has been signaling a recession for the last year starting in the second quarter. If not this quarter, then next quarter,” said Peterson. The Board expects three quarters of negative GDP, or reduced U.S. spending, before returning to growth. Despite recession, Peterson anticipates a limited impact on the labor market. “Unlike the Great Recession or during the pandemic, the economy will likely only lose 1 million jobs,” explained Peterson, causing unemployment to rise from 3.5% to 4.5%. This level is still considered full employment, and thus why it would be regarded as shallow.

Overall at I.CON East, despite talk of a looming recession, of consumers resuming their pre-pandemic ways and a general cooling off, the industrial sector seems as hot as ever – and the large crowds networking indicate that deal-making is ongoing.

In her commercial real estate outlook, Peterson said, “Industrial is a great sector because the country needs big spaces for reshoring and nearshoring of our manufacturing.”

I.CON East speakers also shared their perspectives on how industrial real estate will evolve to meet the changing needs of the consumer, post-pandemic.

Matt Brady, LEED AP, architect and executive vice president, Ware Malcomb, gave an overview of his futuristic vision of a multilevel, sustainable warehouse that can serve urban communities.

Ware Malcomb reached out to partners in the business to help provide insights and flesh out the idea. Namely, DH Property Holdings, “which already designs innovative industrial buildings;” JLL, which offered some perspectives on the tenant side; Parkmatic, a specialty parking company; Suffolk Construction, which helped price the project; and Aquiline Drones, which provided intel on the future of drone delivery and handline.

In Ware Malcomb’s design, goods will come in from trucks through a dedicated inbound lane. As vehicles arrive, they will be synchronized with the needs in the facility, as every vehicle will be tracked in real-time. Truck trailers would be transferred to driverless electric “yard hogs” that would be choreographed using digital technology to move the trailers safely and efficiently.

The building would utilize a super-tall racking system with integrated machine learning and AI, so that for every good that enters the facility, the system knows exactly where it is and where to shuffle it so that it’s easily accessible at the right time.

“In many buildings, you’re feeding goods in on the ground floor, and then everything is going up and then coming back to the ground floor, so the ground level can be a pinch point in the whole flow of the goods process,” Brady pointed out. In their design, instead of goods being delivered to one level, they can now be delivered to three of the upper material handling levels, and it’s a one-way flow. “With three levels of packing and material handling, we’ve actually tripled the outbound, which is a gigantic improvement.”

A typical day for an employee might look like this: the building system would know, based on the employee’s phone, that they’re arriving at work. A fully loaded delivery vehicle would be delivered to the ground floor, where the employee will park their car, get into the delivery vehicle, and start their route. The employee completes their delivery route and drives back to the facility. Again, the system knows they are arriving and prepares a new, fully loaded delivery vehicle so it is waiting for them, with a vacant spot nearby. The employee parks the now-empty vehicle in the vacant spot, moves into the new vehicle, and starts their next route.

On a hypothetical 4.6-acre site, the conventional warehouse would be able to fit about 12,000 pallets. Multistory can fit 27,000 pallets. In the logistics building of the future, that jumps up to 36,000 pallets. The number of dock doors also grows: 22 on a conventional building, 28 on a multistory building, and 93 in the building of the future – 33 inbound and 60 outbound dock doors.

Another panel, moderated by James Geshwiler, co-founder and chief strategy and investment officer, Catalyze; with Alicia Case LEED AP BD&C, WELL AP, SITES AP, Fitwel Ambassador, LFA, Southeast region lead, sustainability, JLL; Nicolette Jaze, head of sustainability, Galvanize Climate Solutions; and Shelah Wallace, director, originations, Nuveen, made the case that when it comes to sustainable design in warehouses, the future is now.

An increasing number of investors are requiring sustainability and tenant demand is growing stronger, yet there is an underwhelming amount of sustainably driven industrial building stock available. Companies that have announced commitments to sustainability and have to execute them want to move into buildings that have been developed to support their goals without incurring any additional costs. Low vacancy rates plus high demand means that nearly everything under construction is immediately leased at delivery.

“Our clients come to us and say we’ve made this commitment, now how can we figure this out?” Case said.

“More investors are requiring that developers are sustainable in some manner. For a lot of the retrofits, it’s a requirement from the investors,” Wallace added.

In fact, the panelists said, to look at the future, first look at Europe: The most sustainable industrial sites are in Europe, thanks to their strong commitment to energy reduction, on-site energy production and water resources. Attracting and retaining workforces in Europe remains a challenge, so industrial properties are investing in health and wellness features including ventilated spaces with plentiful daylight, physical activity areas and childcare facilities.

Source: “Industrial to Stay Strong as U.S. Enters Recession This Quarter, Economist Says“

January of last year marked “the end of the market frenzy,” according to Jeff Small, co-founder and CEO of Atlanta-based industrial investor/developer/owner MDH Partners, which has a portfolio totaling 36 million sq. ft. of industrial assets. As inflation and interest rates took off, it negatively affected deal financing, he noted. Before conditions changed in 2022, industrial investors could borrow at 3.0% rate and buy at a 3.5% cap rate, while realizing improved cash flow through rent growth.

Research from real estate data firm MSCI Real Assets shows a change in investment sales volumes in the sector as interest rates rose. Following an initial drop in activity at the start of the COVID pandemic, industrial sales volumes began increasing in the latter months of 2021, with the year eventually exceeding pre-pandemic, 2019 sales levels by almost three times with $179 billion. Sales volume continued to increase by double-digits year-over-year through the first two quarters of 2022, reaching $42 billion in the second quarter.

For the past three quarters, however, industrial sales volumes have been dropping. In the first quarter of 2023, they declined 52% year-over-year, to $19.6 billion, with steep drops in both portfolio and entity-level transactions.

A changing landscape

Today, in addition to inflationary pressures and higher interest rates, new factors have begun negatively impacting industrial investment sales activity. A post-pandemic slowdown in online shopping is causing a decline in demand for warehouse space, just as a massive amount of new industrial product is being delivered to the market, according to a report from real estate brokerage and advisory firm Newmark. The report noted a 40.4% quarter-over-quarter drop in absorption levels in the first quarter of 2023, considerably higher than the historical average of a 5.0% to 10.0% decline for that period.

Meanwhile, a record 138 million sq. ft. of new industrial space was delivered in the first quarter and more is coming on-line later this year, according to the Newmark. That’s happening at a time when demand for industrial facilities is normalizing after the pandemic era acceleration, and many markets are likely to experience increased vacancy levels and more sublease availability, Newmark researchers noted.

The report does note that the softening in the sector may be temporary. New construction starts already dropped by 38% year-over-year in the first quarter, with the construction pipeline declining to 664.4 million sq. ft. With almost 70% of banks tightening their lending conditions for commercial construction loans so far this year, that will likely further limit new construction starts.

In addition, while both space absorption and rent growth in the sector have slowed down in recent months, they remain extremely strong. At 65 million sq. ft., it was the best quarter for absorption on record compared to pre-pandemic history, and at 21.1% rent growth has also posted its biggest gain ever, Newmark’s data shows.

“Demand may not be what it was in 2022, but is still incredibly strong relative to historical standards, and we are returning to a more normalized lease-up timeline for assets,” said Robert McCall, partner and head of U.S. industrial and Brazil acquisitions at GTIS, a New York-based commercial real estate investor/developer. Industrial tenants continue to be active as they expand operations, especially in facilities of 250,000 sq. ft. or smaller, McCall noted. But the decision-making process for new leases has lengthened from one-two months in 2022 to three or four months today.

Conditions in the market have gone from those where newly constructed warehouses were expected to pre-lease to warehouses leasing six, 12 or 18 months after completion, according to McCall.

“Assets are still pre-leasing, but not all of them,” he added, noting that facilities that are not pre-leased usually end up leasing up within 12 months. “The greatest vacancies, not surprisingly, are occurring in markets where land is available with little barriers to entry, whether that be from a permitting, topographical or other perspective.”

So far this year McCall’s company has closed on three deals, including existing assets in Nashville and Charlotte, N.C. with nearly 1 million sq. ft. of space and land in Houston where the company plans to build two warehouses with a total of 500,000 sq. ft. While he couldn’t reveal financial details behind the deals, “We successfully brought tenants to the two existing assets and have been able to achieve an attractive return on cost for the investments relative to spot cap rates,” McCall noted.

A change in strategy

While positive absorption and declining construction starts are inspiring continued investment in the industrial sector, current market conditions, especially the decline in demand and a glut of new product deliveries, have caused a paradigm shift in investment strategy, according to MDH Partners’ Small.

Many investors, especially those newer to the sector, have shifter their focus from large (500,000-sq.ft. to 1-million-sq. ft.) assets with investment-grade tenants and long-term leases to smaller, multi-tenant facilities with short-term leases, he noted. The idea is that these assets will make it easier to achieve lease-up and generate greater returns by raising rents as leases roll over.

As a result, competition for such buildings is strong, especially for facilities in infill locations with short lease terms, Small said. He noted that these assets are trading at fairly low cap rates, while cap rates have increased by 100 basis points on average for other types of industrial assets in core markets and went up even more in secondary markets.

According to McCall, across the board, industrial cap rates have moved up by about 75 to 100 basis points from their low level at the beginning of 2022, as higher interest rates are forcing investors to bring more equity into transactions.

MDH Partners acquired a large warehouse in Fort Worth, Texas during the first quarter and has a couple other similar-sized deals in the works, but had not acquired any assets in the previous six-month window. The company’s investment approach remains conservative and focused on investing in deals where long-term cash flow is ensured. Small noted that an investment strategy that relies on short-term lease turnover to grow rents could have the opposite effect in a market where demand for space is decelerating and vacancy is increasing.

He added that the pandemic was a once-in-a-lifetime event that accelerated growth in online shopping and demand for industrial space, causing exuberance for investing in industrial real estate that drove prices too high. As a result, he avoids auctions where there are 30 groups bidding on one asset, contending that the winner always ends up paying too much.

In addition to a potential recession on the horizon and tightening lending standards, Small cited the decline in institutional capital available for new deals due to the “denominator effect,” where the higher value of real estate relative to stocks and bonds makes institutions over-allocated to the sector. He expects this will make it more difficult for industrial investors to raise new capital. Acquisitions by both MDH Partners and GTIS are being made out of existing fund vehicles. But McCall noted, “We did, however, raise capital for the Charlotte MSA and received a very strong response from capital [sources], raising the money in a matter of days.”

In addition to new challenges in raising equity, a tighter lending environment will likely negatively affect debt available to both investors acquiring new assets and those needing to refinance maturing debt, according to the Newmark report.

Developers will likely be forced to refinance their construction loans at higher interest rates with more equity as banks are lowering their loan-to-value (LTV) rations from 60%-65% to 50%-55%, Small noted. “Developers will be in trouble if they don’t have ready capital to cover the difference,” he added, suggesting there will be some distress in the development community.

While this has not yet materialized, he said there are already warning signs of it in certain markets with massive amounts of recent new development. He cites Savannah as an example, where a growing port and increases in international imports resulted in zero vacancy, setting off a development spree at a time when import traffic is slowing.

Small also noted that Dallas, which has experienced more industrial construction activity than any other U.S. market, will see an increase in industrial vacancy from the current 6%, especially in large buildings, though the situation is not as precarious as the one in Savannah, because Dallas is a much larger market.

Given continued rent growth, McCall said his company remains bullish on the industrial sector and active in the marketplace, just not to the degree it was in 2021 and 2022. “Acquiring today is very location- specific, and we remain active on both the development and existing asset side, as we see opportunities to create value in excess of spot cap rates.”

Property fundamentals continue to support investment in the sector, he noted, especially in those markets that continue to benefit from on-shoring and changes in supply-chain routes.

Source: “Industrial Investors Show More Caution on New Deals“

“How can this property have $150,000 in ancillary income if it doesn’t have a rooftop lease or a parking garage?” read an email from a colleague asking me to look at a property he was evaluating years ago for acquisition. Honestly, I wasn’t sure, so I did what every good asset manager would do—I called the listing broker to get the story. What was a quiet little medical office building during the day transformed into an art gallery at night. The café became a wine bar every Friday evening, and the art program at the local university displayed student art in common area hallways. They sold the pieces, and the building owner got a percentage of art and alcohol sales, netting an additional $150,000 per year in ancillary revenue.

As headlines on inflation and rising interest rates continue, we’re seeing our property owners’ returns diminish. To add to this challenge, supply costs are increasing, adding salt to our property owners’ wounds from those lower returns. With this changing environment, the role of real estate managers in finding new, creative ways to increase revenue is becoming more important. And while we’re not going to turn every building into an art gallery in the evenings, finding those additional ancillary revenue streams at our properties is becoming critical to reaching our owners’ overall investment goals.

The basics

We certainly have the standards that our industry has used for years. Rooftop leasing has been a favorite way for landlords to collect additional income for things like cell phone towers, satellite dishes, and meteorological equipment, to name a few. Another classic is parking lot revenue. If you’re already charging for parking, then adjusting the rates could increase the parking revenue a property is collecting. If you can’t charge for parking, VIP or covered parking spots can be a great way to add ancillary revenue.

Keeping with these staples, we can look at vending and washing machines. Many of these automated services take up normally unused space in your building and, depending on the location and offerings, can have decent returns.

Many property managers are already aware of these traditional models. They’ve added or continue to expand these services to generate additional property income or are increasing their rates. Now let’s turn to some opportunities we may not have seen or may not yet be utilizing at a high level.

Start with space

Jae A. Roe CPM^®, ACoM^®, president of SOVA Real Estate Solutions in Newport News, Virginia, advises looking at underutilized space to identify new ancillary revenue sources. “You can start by looking at dead or unused spaces in your buildings. These can be from the rooftop all the way down to the lobby.”

Then look at how you can monetize that space—anything from selling goods, food, and beverages to providing services. For example, Roe says that mini and micro-markets are increasing in popularity. “They’re an excellent option to look at, as they are generally unmanned retail space,” says Roe. “The advantage is that they can provide much of the same functional services as a vending machine, but this looks much more like a convenience store or the ‘in-building café’ many have grown accustomed to.”

These unstaffed stores are becoming increasingly popular. Surprisingly, there are already many operators in this space. While most companies providing these services aren’t brands the average person would recognize, others, like Amazon, 7-Eleven, and Walmart, are household names. This concept has become increasingly popular in locations with irregular hours of operation where staffing would become a concern, and we see their successful use in airports around the U.S. While there can be a learning curve or comfort issues for some, the public is quickly adapting.

Putting pets at a premium

Roe points to another opportunity for multifamily properties: offering pet services for residents. These services can range from pet sitting to complete grooming. While this might seem strange initially, according to the American Veterinary Medical Association, 45% of American households own a pet, a 7% increase since 2016. An American Pet Products Association study shows that the largest demographic of pet owners is millennials (32%). According to several studies, millennials tend to make up the largest number of multifamily residents, so these trends in pet care can directly lead to additional revenue opportunities for property owners. Pets and their quality of life have become such an important factor to many renters that entire websites are dedicated to rating multifamily properties solely on their pet-friendly policies and amenities.

Another opportunity can result from residents who don’t comply with the pet policies in place to promote health and safety in the community. “Pet waste has always been an issue on some properties,” says Roe. “Many landlords have shifted to tracking the DNA of residents’ pets and then matching any pet waste they find with those DNA records. They then charge the owner the fees to not only clean up the waste but also to cover the additional materials and labor costs.” This effort normally results in extra labor hours that can be recovered with additional fees; with these fees, owners can cover the costs, ultimately reducing overhead and increasing the NOI.

Consent fees for subleasing

“Ancillary income isn’t only about finding new revenue sources, but also capitalizing on recovering expenses or assessing additional fees,” Roe says. Consent fees for subletting or assignment of space is another trend that Roe has seen pick up since the beginning of the COVID-19 pandemic. It’s been no secret that we’ve seen a significant increase in space to sublease on the market since the beginning of the pandemic. A study by CBRE, Inc., AMO^®, found that the highest peak in the U.S. office sector was the third quarter of 2021, with 162 million square feet of sublet space coming onto the market. This has had price-conscious tenants looking for great deals, resulting in a 60% year-over-year increase in space subleased in the first quarter of 2022.

Consent fees give landlords a chance to monetize these transfers. Each transfer will typically have some legal review and expenses associated with it, which could result in increased operating expenses. Assessing a fee allows management to at least cover the expenses associated with subletting or even add some additional revenue to the NOI.

EV charging stations

Another trend we’re seeing is the use of more electric vehicle (EV) charging stations. The EV charging stations themselves can generate a small profit from those drivers looking to charge their vehicles. A much newer trend, though, is to use these charging stations for advertising. The original model was to use the charging stations to drive a retail sale. For example, consumers might see an ad for a “buy one, get one free” candy bar sale moments before going into their neighborhood convenience store.

There are other uses outside of leaving this last impression to motivate a retail sale. For example, a building occupant might leave their office building for lunch, not entirely sure where to go for their meal. Then, at the EV charging station in the building garage, they see an ad placed by a new restaurant down the street and decide to try it out. Or, as the weather shifts toward winter, the charging station has an ad for winter jackets, motivating a trip to the retailer that placed the ad. These are examples of relatively new opportunities for property managers to earn additional revenue through advertisements.

While increasing ancillary income has many positives, Roe stresses that it’s important to advise clients that additional income could have tax implications. Some ownership groups like real estate investment trusts (REITs) or nonprofits could inadvertently increase their tax liability with new revenue streams. This is something to be mindful of as you work through your management company’s strategy for increasing ancillary income.

While we aren’t going to see thousands of new art galleries opening at our properties in the coming months, there are several options to help property owners increase NOI through the use of ancillary income. So, assess your underutilized space, get creative, and share ideas with colleagues—investment real estate is constantly changing, and new opportunities for ancillary revenue will continue to emerge.

Source: “Revenue recharge“