The commercial real estate (CRE) market is constantly evolving. Today’s market shifts are impacting every facet of commercial real estate, including debt management, which historically has not been a focus area for many firms. But as interest rates rise and leverage decreases, it’s important to be able to understand, manage, and optimize your debt.
Financial modeling is one method that can be used to help you manage your debt and successfully navigate the changes in today’s CRE market.
What Is Financial Modeling in Commercial Real Estate?
In commercial real estate, financial modeling is the act of making financial projections based off of current assumptions as they relate to a commercial real estate valuation and investment analysis. In real estate financial modeling (REFM), you analyze a property from the perspective of an Equity Investor (owner) or Debt Investor (lender) in the property and determine whether or not the Equity or Debt Investor should invest, based on the risks and potential returns.
How is the Commercial Real Estate Market Shifting?
Several factors have contributed to the changes in today’s commercial real estate market. These factors include increasing interest rates, rising cap rates, and rising cost of labor and goods. As a result of these changes, it is now more expensive to acquire or refinance new assets. Additionally, lower asset values and increasing operating expenses have taken effect.
These market changes are impacting projected returns for both the sponsors and the investors. As you navigate the changing CRE landscape, it’s important to consider how your portfolio and debt may be impacted.
How Financial Modeling Can Be Used to Optimize Debt
Forecasting debt is not always easy. If you have a fixed rate loan, it’s important to understand your loan documents to comprehend your pre-payment rights and penalties. With financial modeling, you can review and consolidate your financials to better understand your portfolio and optimize your debt management.
There are many types of financial models with a wide range of uses. The output of a financial model is used for decision-making and performing financial analysis, whether inside or outside of the company. Financial modeling can be used to make decisions about:
- Raising capital (debt and/or equity)
- Making acquisitions (businesses and/or assets)
- Growing the business organically (e.g., opening new stores, entering new markets, etc.)
- Selling or divesting assets and business units
- Budgeting and forecasting (planning for the years ahead)
- Capital allocation (priority of which projects to invest in)
- Valuing a business
- Financial statement analysis/ratio analysis
- Management accounting
About Thirty Capital Financial:
Thirty Capital Financial is a leading service provider to the commercial real estate industry. Our team of advisors have spent decades providing solutions for defeasance, interest rate hedging, and debt management. With our personalized approach, we provide you with the tools, solutions, and strategies to confidently manage debt while supporting the growth of your company