Business Continuity Planning for Commercial Real Estate Professionals

Business continuity planning (BCP) is an essential process for any organization, but it is especially important for those in the commercial real estate industry. Given the nature of their assets and operations, commercial real estate professionals face unique challenges when it comes to maintaining business operations during and after a disruption. This article will provide an overview of business continuity planning, specifically for commercial real estate professionals, including easy-to-implement strategies and a deep dive into the "FORCES" mnemonic.

What is Business Continuity Planning?

Business continuity planning is the process of creating a system of prevention and recovery from potential threats to an organization. The goal is to minimize downtime, protect assets, and quickly return to normal operations in the event of a disruption¹. Disruptions can include anything from natural disasters and pandemics to cyberattacks and economic downturns². A well-defined BCP helps to ensure personnel and assets are protected and can function following an interruption. It also helps ensure compliance with regulatory requirements¹.

A comprehensive business continuity plan should include the following elements:

• Risk Assessment: Identify potential threats to your business.
• Business Impact Analysis (BIA): Determine the potential impact of those threats on your business operations.
• Recovery Strategies: Develop plans to mitigate the impact of those threats and recover from them.
• Testing and Exercising: Regularly test and update your plan to ensure it is effective.

The FORCES Mnemonic

When conducting a Business Impact Analysis (BIA), the "FORCES" mnemonic can be a useful tool for identifying potential areas of business impact:

By considering each of these areas, commercial real estate professionals can develop a more comprehensive understanding of the potential impacts of a disruption and create more effective recovery strategies. It is important to remember that while FORCES covers the main areas, there can be other types of impacts to consider within each area. For example, in addition to the areas listed above, a BIA should also consider the operational impact (that prevents obtaining the product or result of the service), economic impact (due to additional costs, loss of income, penalties, etc.), reputation impact (due to loss of brand image), and legal and contractual impact (by interrupting a specific process, the organization may be in breach of a legal or contractual obligation)³.

Easy-to-Implement Business Continuity Plans for Commercial Real Estate Businesses

Here are a few examples of easy-to-implement business continuity plans for commercial real estate businesses:

• Form a Business Continuity Management Team: Assemble a diverse team with representatives from key departments, such as building maintenance, safety and security, risk management, human resources, IT, legal, finance, and public relations. This team will be responsible for developing, implementing, and maintaining the business continuity plan⁴.
• Develop a communication plan: Establish clear communication channels with tenants, employees, and other stakeholders. This will help ensure that everyone is aware of the situation and knows what to do in the event of a disruption².
• Create an emergency response team: Identify key personnel who will be responsible for managing the response to a disruption. This team should be trained on the business continuity plan and have the authority to make decisions in an emergency².
• Back up critical data: Ensure that all critical data is backed up regularly and stored in a safe location. This includes property records, tenant information, and financial data⁵.
• Establish alternative work arrangements: Make arrangements for employees to work remotely if necessary. This may involve providing laptops, secure remote access to company systems, and alternative communication methods⁵.
• Identify key suppliers and vendors: Develop relationships with alternative suppliers and vendors in case your primary suppliers are unavailable⁵. This includes ensuring these vendors have their own robust business continuity plans to minimize disruptions to your supply chain⁶.
• Review insurance policies: Ensure that your insurance policies are up-to-date and provide adequate coverage for potential disruptions⁵.

Minimizing Reputational Damage

A key aspect of business continuity planning is minimizing reputational damage. In the event of a disruption, it is important to communicate clearly and honestly with all stakeholders. This includes providing timely updates on the situation, outlining the steps being taken to address the issue, and demonstrating a commitment to customer service⁷.

Here are a few tips for minimizing reputational damage during a business disruption:

• Be proactive: Communicate with stakeholders before they have a chance to become concerned. For example, if a hurricane is approaching, a property manager could send out an email to tenants advising them of the potential risks and outlining the steps the company is taking to prepare.
• Be transparent: Provide honest and accurate information about the situation. If there is a delay in restoring services, explain the reason for the delay and provide a realistic timeline for when services are expected to be restored.
• Be responsive: Address concerns and questions promptly. Set up a dedicated communication channel for stakeholders to submit questions and concerns and ensure that these are addressed in a timely manner.
• Be empathetic: Show that you care about the impact of the disruption on your stakeholders. For example, if tenants are displaced from their homes due to a fire, offer temporary housing or other assistance.
• Take responsibility: Acknowledge any mistakes that were made and outline the steps being taken to prevent them from happening again⁷. For instance, if a data breach occurs, take responsibility for the incident, explain what happened, and outline the steps being taken to improve data security.

To effectively manage reputational risk during a disruption, it's crucial to communicate with key stakeholders, such as: ⁸

• Staff: Keep employees informed about the situation and provide clear instructions on their roles and responsibilities.
• Customers, visitors, or guests: Provide timely updates and address any concerns they may have.
• Clients: Maintain open communication and ensure they are aware of any potential impacts on services.
• Suppliers and distributors: Communicate any changes in orders or delivery schedules.
• Industry body or association: Keep them informed of the situation and any actions being taken.
• Regulatory body or agency: Report any incidents as required and comply with any relevant regulations.

It's also important to remember that employees can be a source of reputational risk⁹. Implement employee training and awareness programs to educate them about the company's values, policies, and procedures, especially those related to data security, social media use, and customer interactions. This can help prevent reputational damage caused by employee actions.

Furthermore, data breaches can be a major source of reputational damage¹⁰. Take proactive steps to prevent them, such as:

• Issuing cyber protection policies and procedures.
• Updating information security controls and following through on every security update.
• Hiring encryption experts to boost your cyber security.
• Using advanced threat analytic tools to help detect suspicious activity.
• Setting up a task force trained to be the first responders when disaster strikes.
• Purchasing cyber insurance protection.

Identifying Key Services and Their Impact

Commercial real estate businesses rely on a variety of key services to operate effectively. These services can include property management, leasing, maintenance, and security. In the event of a disruption, it is important to identify which services are most critical and develop plans to maintain them².

One way to identify key services is to conduct a business impact analysis (BIA). This process involves identifying the potential impact of a disruption on each service and prioritizing them based on their criticality¹¹.

The following are some of the most common Key Performance Indicators (KPIs) in commercial real estate that can be used to track the performance of key services and identify areas where improvements are needed: ¹²

• Occupancy Rate: The percentage of occupied units or space in a property.
• Net Operating Income (NOI): A measure of a property's profitability, calculated as revenue minus operating expenses.
• Cap Rate (Capitalization Rate): The rate of return on a real estate investment property based on the income that the property is expected to generate.
• Average Lease Term: The average length of time tenants stay in a property.
• Tenant Retention Rate: The percentage of tenants who renew their leases.
• Rentable Square Footage (RSF) vs. Leasable Square Footage (LSF): The difference between the total square footage of a building and the actual usable space that can be leased to tenants.
• Debt Service Coverage Ratio (DSCR): A measure of a property's ability to cover its debt obligations.
• Return on Investment (ROI): A measure of the profitability of an investment.
• Operating Expense Ratio (OER): A measure of a property's operating expenses as a percentage of its revenue.
• Tenant Satisfaction and Renewal Rates: Measures of tenant satisfaction with the property and their likelihood to renew their leases.

Disruptions can also significantly impact financing and investment strategies in commercial real estate¹³. For example, a natural disaster could damage a property, making it difficult to secure financing or attract investors. To mitigate these risks, it's important to:

• Evaluate various financing options: Explore different sources of funding, such as loans, commercial mortgages, and private equity.
• Conduct cash flow analysis: Determine whether the investment can generate sufficient income to cover expenses and debt service, even during a disruption.
• Assess risks: Identify and manage risks related to market conditions, tenant occupancy, lease expirations, and financing.
• Diversify investments: Spread investments across different property types, locations, and markets to reduce risk.
• Develop exit strategies: Evaluate options such as selling the property, refinancing, or holding for long-term income generation.

Location analysis is another critical aspect of commercial real estate that can be affected by disruptions¹⁴. Factors such as proximity to transportation, amenities, and complementary businesses can be impacted by events like natural disasters or infrastructure failures. Consider these factors in your business continuity plan by:

• Assessing the quality of surrounding infrastructure: Evaluate the resilience of roads, utilities, and telecommunications in the area.
• Identifying potential risks to accessibility: Consider how disruptions could affect access to the property.
• Developing alternative transportation plans: Have backup plans for transportation in case of road closures or public transportation disruptions.

Legal and Regulatory Requirements

Commercial real estate professionals must also be aware of any legal and regulatory requirements related to business continuity planning. These requirements can vary depending on the location and type of business¹⁵.

For example, the Financial Industry Regulatory Authority (FINRA) requires firms to create and maintain written business continuity plans¹⁵. These plans must address a variety of factors, including alternate communications, alternate physical location of employees, and regulatory reporting¹⁵.

In addition to regulatory requirements, it's essential to incorporate best practices into your business continuity plan. This includes: ¹⁶

• Detailed asset inventory: Maintain a comprehensive inventory of all assets, including property, equipment, and data.
• Crisis management guidelines: Establish clear guidelines for crisis management, emergency notification, and media protocols.
• Core recovery teams: Identify core teams responsible for recovery, logistics, and staffing.
• Defined roles and responsibilities: Clearly articulate roles and responsibilities during contingency operations.

Conclusion

Business continuity planning is an essential process for commercial real estate professionals. By developing a comprehensive plan, businesses can minimize the impact of disruptions, protect their assets, and maintain their reputation. The "FORCES" mnemonic is a valuable tool for identifying potential areas of business impact and developing effective recovery strategies.

Commercial real estate professionals face unique challenges, such as managing diverse properties, ensuring tenant safety, and maintaining essential services during disruptions. Addressing these challenges requires a proactive approach to business continuity planning that considers third-party risks, employee training, and legal and regulatory requirements. By incorporating the insights and strategies outlined in this article, commercial real estate professionals can create a robust business continuity plan that will help them navigate any disruption and ensure the long-term success of their businesses.

Additional Resources

Here are a few industry resources that may be helpful for commercial real estate professionals:

• Ready.gov: This website provides information on business continuity planning from the Department of Homeland Security.
• Disaster Recovery Institute International (DRII): This organization offers resources and certifications for business continuity professionals.
• Financial Industry Regulatory Authority (FINRA): This website provides information on business continuity planning requirements for financial firms.
• CBIZ: This company provides business continuity planning services for commercial real estate businesses.

Works cited

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