In commercial real estate (CRE) investments, rental income is key in determining acceptable returns over the long term. While many recognize rental income’s role in CRE investment management, too often tools to assess rental income risk have gone unidentified and not applied to full advantage. Current criteria use lease data and make the assumption that tenants can and will pay rent through their lease period. That hypothesis has been proven wrong time and again.
The National Association of Real Estate Investment Managers (NAREIM) recently asked me to expand on that premise in a Viewpoints article. NAREIM members manage investment capital on behalf of third-party investors in commercial real estate assets and collectively manage more than a trillion dollars of investment assets. It was an honor to be asked to contribute to the dialogue they have with their members.
In the article, “Rental Income Risk Scores: Clues to a Profitable Investment,” I explore one of the main challenges facing the industry: the fact that macroeconomic factors don’t provide the granular level of assessment typically required to determine risk in rental income. Having such a level of granularity can result in a better assessment of the business tenant’s ability to meet basic obligations. That brings an investor closer to assessing true levels of risk to rental income. In addition, you can apply the details on a macro basis for portfolio assessments and derive a risk score for an entire metropolitan statistical area (MSA). Fortunately, several new analytics provide insight for commercial lenders and investors, including indicators of payment delinquencies, risk scores, and late-payment history, among others.