In commercial real estate (CRE), asset management plays a crucial role in maintaining and increasing property value. It involves optimizing financial performance, overseeing property management and capital improvements, and managing tenant relationships. Having the right team in place is key to ensuring properties generate steady income and appreciate in value. In times of high inflation, effective asset management becomes even more critical for securing strong investment returns.

FNRP360™ is an in-house platform created by First National Realty Partners (FNRP), which sets us apart as a leading operator in the CRE sector. Below, we explore how asset management within the FNRP360 approach supports successful outcomes in inflationary environments.

Asset Management: A Key Factor for Managing Inflation

Commercial real estate is often seen as a natural hedge against inflation. However, the way leases are structured can significantly impact how well a property can withstand inflationary pressures.

One of the key features of leases is the base rent, which increases over time, providing property owners with some protection against inflation. Additionally, many commercial leases include a “chargeback” for operating expenses, commonly known as a “triple net” (NNN) lease. With a triple net lease, tenants are responsible for paying a portion of the property’s operating costs, such as maintenance, taxes, and insurance.

During periods of inflation, operating expenses naturally rise, affecting materials and labor costs. For landlords, triple net leases offer a significant advantage, as they transfer the increased costs to tenants, ensuring that property owners are not burdened by inflation-driven expenses.

Rent Escalators: A Strong Tool for Inflation Protection

Another vital tool in asset management is the ability to include rent escalators in lease agreements. These built-in rent increases are designed to keep pace with inflation. Rent escalators are beneficial, but they require tenants to agree to terms that allow for regular rent increases. Properties that are not well-located or have other disadvantages may face challenges in securing tenants who are willing to accept these escalators.

To ensure that rent escalators are effective, FNRP uses a comprehensive due diligence process when acquiring new properties. Our team meets with existing tenants to assess their lease renewal intentions and to determine if they would be open to negotiating higher rents upon renewal. This strategic approach helps us select properties that are positioned to perform well during inflationary periods, making sure that rent increases are a viable part of our asset management strategy.

Managing Expenses During Inflation

While increasing rental income is crucial, controlling expenses is equally important during inflationary times. Operating costs such as utilities, maintenance, and labor tend to rise in inflationary environments. Without careful management, these increased costs can negatively impact the profitability of a property.

FNRP focuses on balancing expense management with the need to maintain high property standards. For example, while some cost-cutting measures like reducing marketing expenses or deferring maintenance might seem like easy solutions, they can ultimately harm the property’s long-term performance by making it harder to attract and retain tenants. By carefully managing expenses, FNRP ensures properties remain competitive while still providing steady returns for investors.

One of the advantages of handling asset management in-house, rather than outsourcing it to third-party firms, is the greater motivation to optimize returns. In-house teams are directly aligned with the firm’s overall goals and the interests of investors, driving efficiency and more effective decision-making.

The Advantage of FNRP360’s Integrated Approach

FNRP360™ integrates all core functions—asset management, acquisitions, legal, property management, leasing, and accounting—into one cohesive platform. This vertical integration gives FNRP a competitive edge, particularly in times of economic uncertainty or inflation. Many firms outsource these key functions, which can slow decision-making and lead to missed opportunities. By keeping everything in-house, FNRP is able to make faster, more informed decisions that benefit both the property and investors.

The integration of these functions also facilitates a seamless transition from due diligence to acquisition. Information gathered during the due diligence process feeds directly into the underwriting process, ensuring that we make well-informed offers on properties. This is crucial in avoiding overpaying for assets and ensuring we can effectively manage the property once it’s acquired.

Aligning Interests for Better Returns

In a vertically integrated firm like FNRP, the interests of the asset management team are aligned with those of the investors. In many outsourced models, third-party managers are incentivized by fees, which may not always align with the goal of maximizing investor returns. At FNRP, however, our team’s compensation is tied to the success of the firm and its investments. This alignment ensures that our team is focused on achieving the best outcomes for our investors.

Conclusion

Commercial real estate offers a solid hedge against inflation, as rising rents and property values often correlate with inflation. However, the ability to capitalize on these benefits depends on effective asset management. FNRP’s in-house platform, FNRP360™, provides the expertise and integrated approach needed to navigate inflationary periods successfully. By maintaining control over asset management, negotiating favorable lease terms, and carefully managing expenses, we ensure that our properties continue to deliver strong returns for investors, even during challenging economic times.