Budget reports are a hot topic in commercial real estate (CRE) as many firms set and finalize their budgets for the year. In CRE, your budget sets the tone for your portfolio’s performance, business’ financial health, and ultimately the firm’s trajectory of growth. Understandably, budget season is a critical, yet stressful, time for many CRE firms. Budgeting requires you to first review this year’s financials and evaluate your portfolio’s performance. Then, you can more accurately forecast and set next year’s budget.
As we approach the end of budget season, it’s important to remember that creating the plan is only the beginning. Once you finalize the budget for the forthcoming year, you must monitor progress and prioritize the firm’s financial goals to ensure a successful year.
Unfortunately, firms that do not use asset management technology might struggle to obtain and access benchmark data, which can help in understanding how your portfolio stacks up against competitors. Additionally, firms that do not leverage technology may find it tough to track their portfolio’s performance and adjust to any “budgeting emergencies” (i.e. unexpected expenses) in real-time.
With internal and external benchmark data, you can compare, evaluate, and verify your CRE budget reports on an ongoing basis to keep a pulse on your business. In our recent webinar, Using Benchmarks to Set and Verify Budget Reports, we discussed best practices and strategies for allocating your spend in the new year.
CRE Market Shifts’ Impact on Budgeting
Today, the commercial real estate market is rapidly shifting. For both seasoned and new CRE owners and asset managers, these shifts have created challenges that impact every aspect of the business, including budgets. According to a Deloitte study, 33% of global CRE leaders plan to cut costs in 2023 in response to changes in the market.
During our webinar, we highlighted the cause and effects of a couple key market shifts:
1.) Increasing interest rates and rising cap rates
As interest rates increase, acquiring and refinancing new assets has become more expensive. In this scenario, owners and investors get less proceeds from their lenders since valuations based on cap rates tend to be lower. As a result, fewer deals are occurring, which should be considered as you finalize your budget.
2.) Rising costs of labor and goods
As the costs of labor and goods rise, operating expenses are increasing. Today, the labor shortage known as the Great Resignation affects about 70% of all commercial real estate firms. Now, it is more difficult than ever to attract and retain top talent. In fact, 65% of CRE hiring managers and HR executives report difficulties in finding the right candidate. As the labor market tightens, talent is demanding higher pay to offset increases in cost of living.
Additionally, the costs of goods have continued to rise, meaning it is more expensive to both develop and operate properties. During the webinar, guest panelist Sal Dragone mentioned his experience with the electricity bills at some properties increasing nearly 70% as a result of expiring contracts and increasing utility costs.
Best Practices for Allocating Spend in Your CRE Budget
Accurate budgeting can help you maximize NOI, boost cashflow to the investor, reduce unexpected expenses, and optimize your expense ratio. But first, you must identify the right places to allocate your spend for the upcoming year. During the webinar, we outlined 5 tips to help you more effectively allocate your spend:
- Consider opportunities to scale your business
- Define clear goals for your properties
- Identify top revenue-generating activities
- Budget for capital expenditures and improvements
- Leverage benchmark data
While these five steps are not an exhaustive list of the steps you can take to determine how to spend your dollars, they can serve as a foundation as you build and finalize your budget.
How to Use Benchmark Data to Prepare Your CRE Budget Reports
Benchmark data enables you to identify actionable insights and opportunities to boost operational efficiencies. With ‘apple to apple’ comparisons and insights, you can understand what’s happening in your CRE portfolio and make more informed decisions.
Lobby CRE enables you to prepare your budget in four simple steps:
Step 1: Compare your 2022 actuals to your 2022 budget.
Step 2: Visualize the growth from 2021 to 2022 actuals.
Step 3: Compare the actuals to other properties in your portfolio using internal benchmark data.
Step 4: Factor in your growth and variance metrics to populate your 2023 budgets.
As you navigate today’s CRE market shifts, your tactics for planning next year’s budget may be different from past years. With technology, you can more efficiently track your property data and forecast expenses to build your budget. Watch the webinar Using Benchmarks to Set and Verify Budget Reports to learn how to compare, evaluate, and verify your budget reports to keep a pulse on your business in 2023 and beyond.