Business
Are You Ready for Multiple CRE Markets?
Delves into the critical strategic considerations for businesses expanding or operating across multiple markets. This guide offers insights into navigating the complexities of multi-market operations, highlighting strategies for successful financial planning and risk management.
In recent years, commercial real estate (CRE) has been hit by rising interest rates, construction costs, and insurance premiums—not to mention overall uncertainty. But this hasn’t stopped some developers from expanding and operating across multiple markets.
David Cocanougher, President of Real Estate at Leon Capital Group & Leon Multifamily is one example. He shared with us how his company completed projects in Arizona, Florida, North Carolina, and Texas and demonstrated resilience in a market slowdown.
How to Know the Right Time to Expand Into a New Market?
That’s not to say it’s easy. On the contrary, “Expanding into new markets can be very challenging,” Cocanougher said. “Our decisions to enter new markets have been driven by a desire to maintain production goals without compromising our investment criteria by forcing more options in the markets we were in.”
To achieve this delicate balance, Leon Multifamily performs considerable due diligence. First of all, they look for markets with similar demand drivers and an overall economic and tax environment similar to the markets they’re already in.
From there, “We spend at least a year prior to moving forward on a project learning as much as we can about submarkets, construction and operational costs, subcontractor base, supply chain constraints, tax valuation process, impact fees among many other decision points that can be unique to each market,” Cocanougher said.
Ultimately, “The time is right when we feel we know the new market as well as we know the ones we currently operate in.”
Leon Capital’s Guiding Principles for Selecting New Projects
When asked about Leon Multifamily’s guiding principles for selecting new projects, Cocanougher said, “Quality locations in strong submarkets that present an opportunity to create value that we may have a unique ability to execute on.”
In other words, it’s all about identifying opportunities you are uniquely positioned to leverage and seizing them. “We chase the sites we have strong convictions about and move to ensure we can acquire the site at the best value and under reasonable terms,” Cocanougher said.
Among other things, this means expanding into markets when supply is relatively constrained but potential rent growth is high. At least for Leon Multifamily, that’s the ideal time to make a move.
6 Tips to Achieve Long-Term Success Amid Short-Term Market Challenges
Of course, you may run into obstacles, such as regulatory hurdles, rising interest rates, or fluctuating exchange rates (when expanding into foreign markets). If you’re not careful, these can derail your investment.
To secure long-term gains despite short-term challenges, Cocanougher recommends developers do the following:
- Get creative in solving capital structure challenges
- Stay flexible in meeting lender requirements
- Take time to find the best cost determination and execution timeline
- Eliminate uncertainties that make you unconfident in your ability to execute
- Show real-time command of the available market data
- Be realistic with your market assumptions for the next 12 to 18 months
The Bottom Line
Ultimately, successfully operating across multiple markets requires extreme due diligence—especially when financial conditions are tough. Developers who do their research, look and wait for unique opportunities, and execute with precision are best positioned to flourish in today’s CRE market.
Frequently Asked Questions (FAQs)
What Are Key Financing Considerations for Multi-Market Operations?
Key financing considerations for multi-market operations include assessing the availability and stability of financing options in each market, building relationships with lenders, learning local lending practices and regulations, managing currency exchange risks (if operating in international markets), and maintaining adequate cash reserves for unexpected costs.
How Do Exchange Rates Affect Financing in Multiple Markets?
Exchange rates can affect the cost of debt and equity financing in various markets and thus impact your project budgets and returns. To mitigate this risk, you may consider hedging strategies, such as forward contracts or currency options that let you lock in favorable exchange rates.
What Strategies Can Businesses Use to Manage Financial Risk Across Different Markets?
To manage financial risk across different markets, businesses can conduct thorough due diligence, stay informed on current economic developments, and diversify their portfolio across location, asset class, and financing methods.
How Does Regulatory Compliance Impact Financing in Various Markets?
Different jurisdictions have their own laws and regulations governing financial transactions, lending practices, and capital markets, with which developers must comply. This may involve obtaining necessary permits and licenses, adhering to tax laws, and following any reporting and disclosure guidelines. Otherwise, you may face serious legal challenges that could disrupt the progress of your project.
What Are the Benefits of Diversifying Financing Sources in Multi-Market Operations?
Diversifying your financing sources in multi-market operations can reduce your dependence on any single funding source, spread risk across multiple lenders and investors, provide access to a broader range of financing options with varying terms and conditions, and enhance your financial flexibility to capitalize on unique investment opportunities.
