By taking an equity interest in and reducing rent to “fresh” retail models, landlords will drive traffic to shopping centers and improve investment returns on the entire shopping center.
While the media at large focuses on doom and gloom, we will turn our commercial eyes towards what we can do in the middle of all this chaos to survive and emerge stronger. These tips focus on retail properties but apply in most cases to all types of commercial real estate.
Remember: It’s never as bad as the guy selling you the news says it is!
Strategies for Improving the Future for Retail Properties
In the fourth quarter of 2008, the overall vacancy rate for retail properties rose to 8.9 per cent. While asking rents rose at year-end, effective rents fell by 1.1 per cent during 2008. Given negative job growth and the sharp decline in retail spending (due to falling consumer confidence), Victor Calanog of Reis, Inc., is projecting continued turmoil in the retail property market through 2011. (For more on Victor’s outlook, seehttp://www.sg-comdigital.com/comdigital/200903ce/?ul=texterity.)
The International Council of Shopping Centers (ICSC) suggests that greater cooperation between landlords and retailers will be crucial to the industry‘s future. As discussed by Sasha M. Pardy of CoStar Group (www.costar.com), ISCS suggests both short-term and long-term strategies that will contribute to a successful future for property owners as well as for retailers.
To have an immediate impact, ISCS recommends the following:
• Shorten the shopping center’s operating hours in order to reduce overhead. While this means that retailers have less access to potential customers, the sharp decline in mall traffic has led to periods which are unproductive for sales. The expense reduction should more than offset the resulting revenue decline.
• Allow landlords to maximize occupancy by not exercising co-tenancy clauses. A mix of retail tenants (as opposed to specific retailers) should generate higher traffic.
• Provide greater transparency in the reporting of sales. If retailers report sales more frequently and with greater clarity, landlords are more likely to respond to requests for rent relief.
• Encourage uncommon strategies. Landlords should allow retailers to clear merchandise faster by holding auctions. To lure local tenants, landlords can offer a package of tenant services, such as accounting or marketing, in order to reduce the tenant’s overhead.
Three strategies are offered to improve long-term prospects:
1. Invest in new concepts. By taking an equity interest in and reducing rent to “fresh” retail models, landlords will drive traffic to shopping centers and improve investment returns on the entire shopping center.
2. Add service providers to the tenant mix. Non-traditional tenants–such as financial services and medical offices–can complement retail stores while filling vacant spaces.
3. Work toward obtaining intra-industry financing. The development of an agency that makes loans based on “covered bonds” (similar to those for mortgage- and asset-backed securities) can provide capital to the retail industry.
Where Have all the Commercial Lenders Gone?
Government Agency guaranteed or sponsored transactions, including: SBA 7(a) and 504, HUD construction loans for multifamily projects, Community Reinvestment Act loans, USDA Business and Industry loans, and to a lesser extent, Fannie Mae and Freddie Mac multifamily loans.
Trading Up Using the 1031 Exchange
A powerful method for building real estate holdings is the use of 1031 Exchanges, which lets investors defer capital-gains assessment on investment property.
Segregate Costs for Better Cash Flow
While costs such as office equipment and furniture are easily recognizable as personal property, construction-related costs that are often included as part of real property may also qualify.
