This Budgeting Season is Gonna be Wild

This fall, real estate property managers, asset managers, and owners will kick off a time-honored tradition: the annual budgeting process. Asset managers will propose 2027 asset-level P&Ls to owners, only to be told to go find more dollars, so they'll turn around and demand those dollars from the property managers, and everyone will go back and forth for a few cycles until eventually, hopefully, God willing, they find common ground before everyone breaks for New Year's — or, more realistically, Presidents Day.

It’s a challenging process even in good years. It is designed to be contentious, to push regional leaders to squeeze their teams, asset managers to get creative, and property-level staff to find coins in the couch cushions.

But this year, it’s going to be an absolute shit show. 

First, many assets are in operational distress like never before. While declining rents were a rarity this time last year, they’re a reality in many markets today, including most Sun Belt metros where institutional investors and REPE bet big last cycle.

Second, asset managers are caught between the pressure to embrace AI and the reality that many AI tools haven't yet delivered the substantial NOI gains owners are expecting. There are plenty of good reasons for this, but none of them make it any easier to justify signing up for new costs in a weak operating environment.

"Wait," one might say. "Technology offers the solution by boosting operating efficiencies, and that's the only place to find NOI right now!"

That might be true. But few real estate operators want to hear it, at least not this budget cycle.

Macro Clouds

For real estate operators, the interest rate environment has been challenging since late 2022.  While this put pressure on assets that were poorly financed, particularly those with high-leverage floating rate debt, multifamily owners were quick to differentiate between financial distress and operational distress.  Financial distress (the asset is performing fine but can’t refinance at current rates) happens to the best of us; operational distress (the asset suffers from high vacancy and declining rents) is something that only afflicts those idiots who hold office assets.