The Top Real Estate Exit Strategies You Need to Know

Just as you need to know where you’re headed when you take a highway exit, you need to know your commercial real estate exit strategies. This is especially important amid an environment of higher interest rates, higher inflation rates and lingering economic doubts.

Ideally, you should determine a real estate exit strategy for a property or a portfolio before you purchase them. But in some cases, you may need to establish an exit strategy after making a purchase or tweak the strategy.

You might decide to carry out a real estate exit strategy when:

• An asset or collection of assets has met or even exceeded the targeted returns.
• An asset or collection of assets is failing to deliver the expected returns.
• The short or long-term outlook for the sector in which you’re invested (such as industrial or multifamily) is great, so you want to capitalize on the sector’s strength and realize gains.
• The short or long-term outlook for the sector in which you’re invested (such as office or retail) isn’t good, so you want to cut your losses.
• The real estate market in general isn’t performing well, and you want to put your money into a different asset type. 

What are the main exit strategies for commercial real estate?

A commercial real estate investor enjoys several options to carry out an exit strategy. Here are three of the main exit strategies if you’ve got a commercial mortgage and are holding an asset for a short term — i.e. 12 to 36 months. 

1. Acquisition to stabilization

In this scenario, you buy and renovate a property and then lease up the property.

Two possible exit strategies in this situation are:

• Sell the asset.
• Refinance a short-term loan to permanent financing.

2. Construction to stabilization

This strategy involves building and leasing up the asset and then embracing one of two potential exit strategies:

• Sell the asset.
• Refinance from a short-term loan to permanent financing.

3. Acquisition, repositioning and stabilization

A third option is buying an asset, repositioning it from one asset class (such as a hotel) to another (such as a multifamily), and then leasing up the property.

Two possible exit strategies are:

• Sell the asset.
• Refinance from a short-term loan to permanent financing.

“Understanding what your real estate investment exit strategy options are and being prepared to execute the one that makes sense for your current goals — or a different one if conditions change — is essential to successful investing. Ideally, ‘success’ means getting a good return on your investment,” according to Forbes.

What are the six key components of an exit strategy?

An exit strategy comprises several components, including:

1. An outline of your investment goals.
2. An assessment of your property’s value.
3. An examination of approaches for boosting the property’s value ahead of a sale or refinancing.
4. A review of the advantages and disadvantages of the exit strategy or strategies under consideration.
5. An overview of ways to minimize tax implications.
6. A look at the steps required to execute your exit strategy.

When you’re fine-tuning these components, be sure to consult with your attorney, accountant, lender, real estate broker and other professionals who can help craft your exit strategy.

How are today’s capital markets affecting investors’ ability to refinance or exit investments?

Today’s capital markets — namely the ongoing rise in interest rates — certainly affect the ability of investors to refinance commercial mortgages or exit their investments altogether.

“For real estate owner-operators and investors, interest rates are not only the price of debt but also the driver of asset values — a double whammy,” accounting, advisory and consulting firm EisnerAmper points out.

EisnerAmper notes that “a higher and more unpredictable cost of capital” has bumped up the riskiness of deals. As part of this risk-taking, commercial real estate investors are grappling with higher rates on debt coverage and collateral value. As a result, commercial mortgage rates have more than doubled in the recent past, the firm says.

“The uncertainty caused by interest rate volatility and the macro withdrawal of the sector’s liquidity are causing real estate investors to focus on shoring up their existing portfolios rather than providing fresh capital to new transactions,” says EisnerAmper.

That uncertainty is likely to last as long as interest rates remain elevated. That said, it may soon be time for the Fed to begin considering pausing rate hikes, according to Bankrate, with a possible halt coming before the end of 2023. Today’s interest rate reality is coupled with a tightening of underwriting standards by commercial real estate lenders.

Still, despite the squeeze on the availability of commercial estate loans, nonbank lenders have begun stepping in to fill the liquidity gap. Real estate services provider CBRE says capital is available for the right deals, such as industrial, high-quality multifamily and grocery-anchored retail, or for established creditworthy borrowers. 

The Swiss Re Institute says tighter lending standards, forecasts of weak economic growth outlook and vulnerability in the financial sector mean the U.S. commercial real estate sector may face considerable headwinds over the next several years. Therefore, it’s more important than ever for commercial real estate investors to have their exit strategies carefully planned before making investments in today’s market environment.
Contact the Broadmark Realty Capital team to learn how we can help with your commercial real estate exit strategy.