Randy Horning, MSRE, Associate Vice President, NAI James E. Hanson
Regardless of property type, one of the most important steps in any commercial real estate investment is not just the sale or purchase of the property itself, but rather looking at the investment holistically to ensure the property can achieve the desired return. While a building might be generating a strong return today, can the same be said for its value five or ten years down the line? That’s where the underwriting process comes in.
What does the underwriting process look like?
While approaches may vary slightly from broker to broker at NAI Hanson, our firm’s deep local knowledge and decades of expertise act as the common thread that guides our extensive, hands on underwriting process. Together with my partner, Darren Lizzack, our team takes a unique, time tested approach to this process based on our decades of experience in the market. Our specialization in medical office space, also adds additional value to the process as this asset type can often fall victim to layers of complexity as buildouts and permitting can add unexpected costs to an acquisition, making it critically important that we execute our underwriting as accurately as possible.
Countless variables come into play in the valuation of a property, many of which stem from the current and future states of the local market in which it is located: local property taxes, market demand and occupancy levels all impact this number. Additionally, a building’s age, design, and other features must be factored into the broader market conditions to paint a truly accurate financial picture.
Therefore, instead of the more common annual approach to underwriting which only provides a basic top-down overview, we develop monthly financial models to closely track net operating income (NOI), tenant turnover and retention, tenant improvements (TI) and other costs such as property taxes and revenue streams including rent and other services. This approach allows for a more accurate picture of an asset’s performance. While an annual overview may reflect a positive trend for the year, there may be some months that will fall in the loss column and could be worth taking a second look at.
Why is accurate underwriting important?
One of the main consequences of inaccurately underwriting an asset is the discrepancy that is then created between your valuation of the property and the financier or lender’s valuation of the property. Lenders take a critical eye to every aspect of a property as they will be assuming the risk of the property value when they approve a loan for its purchase.
When underwriting an asset, it’s important to identify any pitfalls in the property that could cause potential lenders to place it at a lower value. Taking a hands-on approach to the process allows our team to uncover these challenges up front and develop a strategy to address them as opposed to becoming aware of them further down the line.
What are the benefits of local market knowledge?
To ensure an accurate approach to the underwriting process, we complete every evaluation of a property on a case-by-case basis per property, per client. Although national firms may inadvertently place all New Jersey markets on the same plane or make inaccurate assumptions based on experience in other markets, we recognize that our market is unique and needs to be evaluated as such to ensure we determine the most accurate numbers possible for our clients
Additionally, being entrenched in northern and central New Jersey’s local real estate markets allows us to have a firm understanding of the capabilities of local vendors and the costs associated with utilizing their services. On a recent project where a client was contemplating the purchase of a space, we were able to tap into our networks to quickly secure quality vendors including an inspector, architect, contractor, designer, IT firm, lending institution, moving company, and a solar and energy efficiency company to both provide estimates and perform the work. Through accurately projecting costs of a project and securing vetted trusted vendors, we were able to provide our client with the real data they needed to make an educated decision and also ensure the work would be done right the first time. This localized approach speaks to not just our experience in the market but how we are able to leverage our networks and knowledge on behalf of our clients in several areas. Knowing who to talk to in order to get the job done as well as a granular understanding of the cost of goods and services or resources based on the local market not only makes sense for buyers and lenders financially but also functionally.
Looking to invest in New Jersey’s medical office market?
No matter what your health care real estate needs look like, the team of Darren Lizzack and Randy Horning is ready to represent you, please reach out to us at (201) 478-7392 or email rhorning@naihanson.com to learn more about how we can help.
