Navigating Risks in Commercial Real Estate Investment: Lessons from American Assets Trust`s Portfoli

When investing in commercial real estate, it`s crucial to think about the possible steps that the owner of a portfolio of investments could have to take if certain hazards materialize. The investment industry is substantially divided now, with companies that are driven by rates on one side and entities that are shielded from rates on the other. Today, we analyze the portfolio of American Asset Trust, a $1.6 billion REIT (Real Estate Investment Trust), to demonstrate how hazards in a particular portfolio can be identified and used to create a larger risk profile for an investor. It is important to note while examining AAT that it is designated as a diversified REIT, but as will be seen, this diversification is relatively limited and only offers the investor a shaped diversity rather than a full one.

Property	Property Type	City	State	Square Feet / Number of Units
Alamo Quarry Market	Retail	San Antonio	Texas	588,970 Sq Ft
Carmel Country Plaza	Retail	San Diego	California	78,098 Sq Ft
Carmel Mountain Plaza	Retail	San Diego	California	528,416 Sq Ft
City Center Bellevue	Office	Bellevue	Washington	495,800 Sq Ft
Del Monte Shopping Center	Retail	Monterey	California	673,572 Sq Ft
Embassy Suites at Waikiki Beach Walk	Mixed-Use	Honolulu	Hawaii	369 Guestrooms
First & Main	Office	Portland	Oregon	360,641 Sq Ft
Gateway Marketplace	Retail	San Diego	California	127,861 Sq Ft
Geary Marketplace	Retail	Walnut Creek	California	35,156 Sq Ft
Hassalo on Eighth	Multifamily	Portland	Oregon	657 Units
Imperial Beach Gardens	Multifamily	San Diego	California	160 Units
La Jolla Commons	Office	San Diego	California	723,349 Sq Ft
Lloyd District Portfolio	Office	Portland	Oregon	581,741 Sq Ft
Loma Palisades	Multifamily	San Diego	California	548 Units
Lomas Santa Fe Plaza	Retail	Solana Beach	California	209,569 Sq Ft
Mariner`s Point	Multifamily	San Diego	California	88 Units
One Beach Street	Office	San Francisco	California	97,614 Sq Ft
Pacific Ridge Apartments	Multifamily	San Diego	California	533 Units
Santa Fe Park RV Resort	Multifamily	San Diego	California	4 Units & 122 R
Solana Beach Towne Centre	Retail	Solana Beach	California	246,730 Sq Ft
Solana Crossing	Office	Solana Beach	California	212,633 Sq Ft
Southbay Marketplace	Retail	San Diego	California	132,877 Sq Ft
The Landmark @ One Market	Office	San Francisco	California	419,371 Sq Ft
The Shops at Kalakaua	Retail	Honolulu	Hawaii	11,671 Sq Ft
Torrey Point	Office	San Diego	California	90,334 Sq Ft
Torrey Reserve	Office	San Diego	California	516,677 Sq Ft
Waikele Center	Retail	Waipahu	Hawaii	537,637 Sq Ft
Waikiki Beach Walk	Retail	Honolulu	Hawaii	96,707 Sq Ft

Here are some possible outcomes and the associated steps that could be performed to make them better:

Economic Recession

The value of the properties in the portfolio may drop in the event of a downturn or other disruption in the economy, which may affect the owner`s capacity to repay any debt secured by the properties. In this case, the owner might have to sell some of the properties or refinance some of them in order to create enough cash flow to pay for any financial obligations.

Tenant Vacancies

The owner of any of the properties may be required to reduce rents or offer incentives to entice new tenants if there are significant tenant vacancies in any of the buildings. In the worst instance, the owner might be compelled to sell the property or deliberately default to prevent suffering substantial losses.

Natural catastrophes

In the event of a natural disaster, the owner might be required to perform necessary repairs to the damaged properties in order to make them livable and compliant with any applicable regulations. The owner may need to obtain extra debt or equity financing to pay for the repairs, depending on the extent of the damage. This geographic concentration becomes significant significance given that this portfolio is largely concentrated in Western states, which are statistically grouped with a high likelihood of experiencing natural disasters.

Capital Investments

The owner might need to find additional funding to cover these costs if any of the properties require sizable capital investments. Instead than paying the costs related to these capital investments, the owner may choose to sell the property.

Regulatory Shifts

The owner may be required to make improvements to the properties to ensure that they conform with the new requirements if there are changes to zoning laws, building codes, environmental restrictions, or other variables that have an impact on the properties. This could necessitate large capital investments or modifications to the property`s use, both of which could lower the property`s value. These renovations might need to be paid for by additional debt or equity funding provided by the owner.

Market Instability

Since yields on longer-dated paper should be greater than those on shorter-dated paper due to the time value of money, markets could become significantly less liquid if market interest rates continue to diverge from shorter-term rates set by the Federal Reserve. Nevertheless, in the current market, when the yield curve for US Treasuries is inverted, longer-term rates are actually lower than shorter-term rates. This is uneconomical and must change eventually to prevent markets from possibly collapsing as a result of the yield backwardation.

Management Problems

The owner might need to employ a new management business or restructure the management team if any of the properties have management concerns. This could result in higher expenses for hiring and training new management staff, which could have an effect on the property`s profitability.

Think Ahead About Strategy

Investors must have a thorough understanding of the various hazards involved with a commercial real estate portfolio in order to make wise investment choices. Investors can better plan for future difficulties and lessen the impact on their investment returns by taking into account the various actions that may be necessary in the event these risks present themselves. Therefore, it is crucial for the owner of an investment portfolio to have a thorough risk management strategy in place to be ready for unforeseen obstacles. The following tactics can aid in reducing the risks connected with a portfolio of commercial real estate:

Diversify

As was already mentioned, diversity helps reduce the risks brought on by geographic and tenant concentration, but diversification is more than just owning various assets. Their correlation needs to be correct. The portfolio owner can reduce the risk of having a single economic crisis or tenant vacancy having a significant impact on their business by investing in a number of properties in various cities and with various tenant bases.

Complete Due Diligence

Finding potential hazards linked with an asset requires extensive analysis. To find any problems that can affect the property`s value or cash flow, the portfolio owner should go over all pertinent documentation and perform site inspections. If these are impractical, they can be approximated in other ways, such as by obtaining them from

Dependable Leadership

For properties to be well-maintained and for tenant retention rates to be high, a solid management team is essential. The owner of the portfolio should avoid shortcuts and work with seasoned property managers who have a track record of success in managing properties like these.

Suitable Insurance Protection

Putting the right insurance coverage in place helps reduce the risk of liability, property damage, and natural disasters. To make sure that all properties are sufficiently covered and that property-specific risks are taken into consideration, the portfolio owner should cooperate with an experienced insurance broker.

Ensure Sufficient Liquidity

For the portfolio owner to be able to handle unforeseen expenses, such as capital expenditures or financing commitments, it is imperative to have appropriate liquidity. The owner of the portfolio should make sure there are enough financial reserves or credit lines available to pay any unforeseen costs. From a statistical perspective, this process may be handled because the reserve capital base`s size and level of liquidity can change in real-time.

Continue To Learn

The regulatory landscape and the state of the economy are dynamic, and it is crucial for the owner of the portfolio to be aware of any foreseeable hazards. The owner of the portfolio should continuously examine market trends, legislative developments, and economic data to spot potential obstacles and modify their approach. Fortunately goodness, this demand may be quite adequately met by programming current automation technologies.

Investor success depends on recognizing and minimizing risks related to a portfolio of commercial properties. The owner of the portfolio can reduce potential risks and achieve long-term investment success by putting into practice strategies like rational diversification, meticulous due diligence, locating and keeping strong management, appropriate insurance coverage, maintaining adequate liquidity, and staying informed.