Commercial real estate investor activity remains muted, with JBREC and CRE Daily saying that 71% of investors reported holding their positions in Q2, the highest level in the survey’s history. Hands-on investors can take proactive measures to maintain strong risk management—helping safeguard portfolios against intensifying headwinds even as the landscape shifts.
How can investors adapt risk practices to counter growing threats in financial, climate, and demographic domains? By taking cautionary measures, GPs can carefully structure investments, tighten asset oversight, and build business adaptability.
Risk mitigation provides a way to steer around rising challenges while still maximizing returns. Firms willing to boost risk control efforts can end up with more stable portfolios and value protection down the road.
Key takeaways
- Continually assess your core risk exposures in commercial real estate—across markets, properties, finances, and management.
- Implement risk management by analyzing markets, stress-testing assumptions, structuring finances conservatively, maintaining asset quality, and monitoring performance.
- Risk avoidance capabilities better prepare real estate organizations. Build team skills in due diligence, asset systems, and leadership to control risks and seize opportunities in turbulent times.
What is commercial real estate risk management?
Commercial real estate risk management is the practice of managing financial, market, legal, and operational risks to protect the value and income of commercial property investments. It involves identifying potential threats such as market volatility, tenant defaults, regulatory changes, environmental hazards, and maintenance issues, then implementing strategies like insurance coverage, diversification, lease structuring, and compliance measures. The goal is to minimize losses, ensure steady cash flow, and safeguard long-term asset performance.
Types of commercial real estate risks
Risk assessment involves evaluating several key areas that can threaten your real estate investments:
Economic risk
Exposure to economic contractions varies across the commercial real estate market. This risk may intensify in 2025 as forecasts anticipate a slowdown in consumer spending and total US GDP growth of less than 1% in Q3 and Q4 of 2025. Sectors like hospitality and retail mirror overall consumer cycles, while areas like medical office buildings may see less impact. Evaluate your risk to economic factors such as:
- Capital flow: Tight lending conditions and rising interest rates can compress property valuations.
- Business cycles: Portfolios heavily tilted toward highly cyclical sectors like hospitality or retail face heightened tenant industry risk.
- Inflation: Sustained higher inflation in utilities, taxes, and maintenance can outpace rent growth’s offsetting capacity.
Market risk
Supported by a US economy that grew 5% beyond pre-pandemic levels, commercial real estate rode an expansion wave as capital flooded in and lending conditions loosened. This growth fueled development across sectors. For example, in multifamily, 750,000 new apartment units came online nationwide in 2023, creating oversupply challenges in some markets. For all commercial property niches, GPs should assess factors like:
- Rental and vacancy rates: Evaluate if local rental rates and vacancies are on upward or downward trends.
- Market supply/demand dynamics: Analyze whether the local market is over- or undersupplied for the property type, as well as new developments in the pipeline.
- Local employment trends: Determine the status of employment rates in the region and the potential for reduced demand.
Location risk
The geographic placement of commercial buildings can contribute to or mitigate external exposures. Potential risks as you analyze commercial real estate projects include:
- Zoning and regulatory changes: Evolving regulations can constrain property uses and development potential.
- Infrastructure and accessibility: Transportation and access to essential services increase a property’s appeal.
Property risk
Property risks are potential threats related to the physical buildings, equipment, sites, and surrounding land areas that are tied to commercial real estate assets.
Case in point: In 2024, the United States witnessed 27 climate-related events, each causing over $1 billion in damages, highlighting the increasing vulnerability of properties to natural disasters. This growing concern underscores the need for comprehensive risk management strategies addressing:
- External impacts: Weather, natural disasters, accidents, or criminal activity can cause damage, highlighting the importance of preparedness and resilience measures.
- Environmental risk: Hazardous materials, air pollution, and water contamination require monitoring and remediation efforts.
- Aging and obsolescence: As buildings age, they may fall behind current market standards in technology, design, and amenities, requiring periodic updates and renovations.
Tenant risk
For real estate investors in triple-net, office building, or medical office spaces, factors to assess tenant risks include:
- Credit risk: Regularly check ratings and financials to understand a tenant’s ability to fulfill lease obligations.
- Industry distress signals: Closely track tenant industries to spot early signs of reduced demand that could indicate move-outs or bankruptcies.
- Lease expirations: Lease expirations increase risk since openings allow distressed tenants to vacate the property.
- Build-out costs: Allowances to attract replacement tenants may require you to remodel spaces. These unforeseen capital costs can erode targeted returns.
Asset risk
Controlling risk in the lifecycle of your commercial property includes areas such as:
- Functional decline: Properties may fall out of step with evolving tenant preferences in layouts, technology infrastructure, or amenities, underscoring the need for regular modernization.
- Maintenance: Critical building systems such as HVAC, plumbing, and electrical require regular repair or replacement. Neglecting these can lead to unexpected capital expenditures.
- Materials/labor inflation: Construction costs that rise faster than rents present a major hurdle for value-add investors dependent on planned renovations.
Financial risk
Financial risk refers to potential threats related to the financial capacity and flexibility associated with a commercial real estate asset. Deloitte’s 2025 commercial real estate outlook reveals that the investors’ top concerns over the next 12-18 months include elevated interest rates and the high cost of capital. These trends increase risks such as:
- Excess leverage: High levels of property debt become challenging to service as income declines, highlighting the importance of balanced financial planning.
- Interest rate risk: Interest rate increases lead to escalated expenses, underscoring the need for strategic debt management.
- Inflexible equity terms: Fixed return requirements to real estate investor partners may restrict GP’s cash flow cushion, emphasizing the value of flexible financing arrangements.
- Inadequate reserves: Having insufficient capital to address large, unexpected expenses points to the necessity of maintaining robust financial reserves.
- Limited contingency financing: The inability to access additional capital when operating funds are inadequate stresses the importance of diverse financing strategies.
- Insurance coverage adjustments: Recent industry surveys indicate that more than 60% of commercial real estate insurers have increased deductibles for multifamily properties and tightened policy exclusions.
Credit risk
Credit risk includes the financial stability of key business partners associated with commercial properties. Key vulnerabilities to assess include:
- Tenants: Financial distress lowers tenants’ ability to fulfill lease payment obligations and requires allowances or vacant periods upon departures.
- Lenders: Tightening credit standards, risk adjustments, or losses can prompt changes to loan terms, reserves, or restrictions, minimizing flexibility.
- Partners/investors: Changes in profitability, liquidity, or strategic direction can impact willingness or capacity to fund capital calls critical for initiatives.
Management risk
Management risks are potential threats resulting from ineffective oversight and poor decision-making by sponsors, asset managers, or property managers. Avoiding risk includes understanding gaps in the following:
- Financial controls: Shortcomings like poor budgeting discipline, inadequate reserves, and a lack of procurement policies can impact asset quality and profitability over time.
- Reporting deficiencies: Insufficient monitoring and transparency into property performance limit situational awareness and allow problems to go undetected until reaching critical stages.
- Market intelligence failures: Inability to understand tenant needs, benchmark competitive offerings, and recognize disruptive influences can undermine tenant retention and relevance.
- Maintenance and lifecycle planning shortcomings: Inadequate capital needs budgeting for resilience measures, building system upgrades, and functional modernizations, resulting in decreased value.
- Human resources: Inconsistent hiring and talent management practices produce skill gaps that lead to operational execution breakdowns or expose properties to compliance risks.
Environmental risk
Environmental risk stems from hazards that can lower property value, limit use, or create costly compliance obligations. These risks can emerge from both natural conditions and human activity, and are increasingly under scrutiny as environmental regulations tighten.
Here are some common environmental risks to watch for:
- Hazardous materials: Presence of asbestos, lead paint, polychlorinated biphenyls (PCBs), etc. in older structures
- Contamination: Soil or groundwater pollution from prior industrial uses or neighboring sites
- Poor air quality: Mold or particle pollution that could affect tenant health
- Climate-related risks: Properties located in floodplains, wildfire zones, etc. that could incur higher insurance costs
- Regulatory compliance: Evolving environmental laws imposing stricter monitoring, reporting, and remediation obligations
Technology and cybersecurity risk
Technology and cybersecurity risks arise from the industry’s growing reliance on digital systems for building operations, tenant services, and financial management. As this trend continues, vulnerabilities to data breaches and system failures increase:
- Building system vulnerabilities: Internet-connected HVAC, lighting, and access control systems susceptible to hacking
- Data protection: Risks of tenant, employee, or investor information being stolen or exposed due to weak security protocols
- Operational disruption: System outages from cyber incidents halting leasing, rent collection, or maintenance scheduling
- Third-party risk: Security weaknesses in vendor platforms or property management software impacting multiple assets
Commercial real estate risk management strategies
What strategies can commercial real estate professionals use to mitigate risk in 2025?
1. Detailed market research
Conducting market analysis helps assess demand and whether commercial investment opportunities meet your risk thresholds. Market research as part of due diligence includes:
- Review occupancy, rental rates, and absorption trends in the local submarket area to set your baseline performance expectations and track progress.
- Forecast leasing demand growth by linking property type demand drivers like demographics, employment expansion, and infrastructure development.
- Estimate future competitive supply coming online by tracking new development permit filings.
- Create tenancy mix strategies for drawing differentiated tenants from various industries.
2. Create a risk management plan
Develop a risk management plan that can evolve with your portfolio to address changes in market conditions, asset status, financial arrangements, and management practices. The plan should outline preventative actions, regular monitoring procedures, and response protocols.
Examples could be offering shorter lease terms if you see reduced tenant demand or adapting a building to a different tenant mix.
As you buy and sell commercial property, revisit the plan and align it to fit your current scenario.
3. Property-specific risk management
Managing risk at the asset level provides a first line of defense for your portfolio. Developing plans tailored to the dynamics of each property helps to isolate and control threats specific to individual holdings. Preventative measures at a property level include:
- Evaluate physical attributes, operating systems, usage patterns, and other singular exposures of each asset.
- Continuously check market competitiveness and tenant credit health to gauge external risks.
- Document risk scenarios and continuity responses so you can act decisively when incidents strike.
4. Maintain properties
Ongoing maintenance limits hazard exposure and safeguards your assets over their lifecycle. It can be tempting to defer maintenance, but real estate investors can combat this tendency by taking a proactive stance on property care. This includes annual inspections and scheduling preventative upkeep.
5. Commercial property management tools
Using technologies like commercial real estate management software allows you to gain oversight into key risk factors. Stay ahead of common risks with centralized financial reporting, maintenance tracking, and document storage.
6. Maintain records
Disorganized or missing business records expose assets to elevated risk, ranging from compliance gaps to inadequate attention. Implement centralized digital filing policies for all property documents, such as leases, contracts, and permits.
7. Buy commercial property insurance.
A sound insurance program provides an added layer of financial protection by covering critical loss exposures that your internal protocols alone cannot always prevent. Buy commercial insurance policies to cover property damage, business interruption, and specialized risks like cyber incidents.
Expert tip: Proven strategies for navigating CRE risk through cycles
As someone who’s been through a few market cycles, here’s what I’ve learned about CRE risk management:
- Never skip tenant screening. It’s cheaper to prevent a bad lease than to fix one.
- Keep more cash reserves than you think you need. Surprises in CRE are rarely cheap.
- Regularly walk your properties. You’ll spot risks a spreadsheet can’t show you.
- Build a strong network. Good relationships can buy you time when the market turns
Miles Hector is a Solutions Engineer at Agora in New York. He began in ABS and derivatives at Bank of America Merrill Lynch before moving into real estate private equity, focusing on infill development financing in the Western U.S., particularly Los Angeles County.
Risk assessment and analysis methods
To assess CRE risk, follow these proven risk assessment and analysis methods:
Due Diligence and feasibility studies
Due diligence is the first and most important step in risk assessment. It involves verifying property details, assessing a deal’s financial viability, analyzing the property’s physical condition, and evaluating the deal in the context of the larger market and the opportunity costs.
Risk scoring and modeling tools
Risk scoring frameworks help you quantify risk by assigning values to key exposures like tenant credit, property condition, location desirability, market volatility, etc. You can then pair scores with a modeling tool to simulate possible outcomes over time.
Market data and forecasting techniques
Forecast CRE risk by considering market data like employment growth, interest rates, demographic trends, absorption rates, etc. While historical data can never fully predict the future, it can provide important insights.
Technology in CRE Risk Management
These digital technologies make it easier to anticipate, measure, and mitigate CRE risk:
Predictive analytics and AI applications
Predictive analytics pairs historical data with machine learning to forecast potential outcomes, such as tenant default probability, maintenance needs, or optimal rent pricing strategies.
PropTech tools
Modern property technology platforms can help you minimize CRE risks by streamlining your investment management. For example, Agora can help you automate waterfall distributions, capital calls, and fund management to avoid human errors.
Blockchain
Blockchain can facilitate secure and transparent contracts and transactions. Though the technology’s integration with CRE is still in its early stages, potential benefits include immutable audit trails and smart contracts that automatically execute upon predefined triggers.
Conclusion
In 2025’s unpredictable CRE market, good risk management is a must. The most successful investors will be those who carefully watch their exposure and adapt quickly to changing conditions. While external forces like interest rates and climate threats may be out of your control, the right risk management strategies can position you for long-term stability and growth.
