From Ownership to Optimization: Strategic Options for Underperforming Corporate Real Estate Assets

Successful investors in commercial real estate across the country are constantly finding tactical ways to add value to their existing portfolios, including by finding creative solutions to improve underperforming properties. In recent years, many real estate owners have repurposed underperforming real estate assets to increase performance profitability. Sluggish movie theaters have “evolved” into dynamic entertainment facilities, and department stores have been converted into fitness centers. It is important to keep in mind, however, that any change in a property’s use may require variances or other zoning-related changes and approvals.

Commercial real estate owners with underperforming assets are exploring the wide range of options available to them to unlock value. Government incentive programs may be available in certain jurisdictions to help offset the cost of expensive renovations or conversions. Local governments have a great incentive to increase commerce in their areas, as this can benefit the local economy and increase tax revenue, and public/private partnerships can often benefit all parties involved. While these programs may be complex and involve expensive up-front costs to implement, they often pay off in the long run. 

Changes at the operational and/or management level can also be key to correcting underperforming assets. For example, a number of investors have turned around their underperforming assets by forming strategic JV partnerships with experienced operators. Restructuring investments can be costly, and they are not without controversy (for example, an existing investor may not want to cede economic and management control to an outside party). But when done right, underperforming properties can exponentially increase their value once experienced partners are brought in.

Dealing with underperforming assets is a normal part of life in commercial real estate. The priority is to diagnose the cause, map the regulatory and capital requirements, and select an operating model that aligns with your risk appetite, time horizon, and market.