How To Handle Your Center In Trying Times
Some basics of shopping center management from a 25-year professional to keep your center from becoming a negative statistic.
Sandy Sigal

Wasn’t it just yesterday that you closed on that shopping center, that once-in-a-lifetime dream deal with the rents that just kept going up and up and up?

Yes, you shrewdly out-negotiated your competition on the deal — by paying more money and closing in 2 days — and the deal seemed safe, with two exceptional anchors; the national linen tenant with great credit and the national electronics tenant with the funky storefront, book-ending seasoned mom-and-pop in-line tenants, who were immune to such nitpicky things as high rent-to-sales ratios. Sure, you underwrote it on future income (10 years in the future, no less) and based on no vacancy, but heck, when the interest-only portion of the loan burned off, you’d just refinance it and pull more money out, right?

This center was going to hum like an ATM machine; an ATM machine with a name that ended in Town Square, Promenade or Village. Yes, a proverbial goose that lays golden eggs, just like the apartment building you traded, which was always full, and tenant retention meant that you had the building painted every 5 years. How things have changed in a year.

If, as the saying goes, misery loves company, then the good news is that you have a lot of new friends. The bad news is that every day, shopping centers all around us fall deeper and deeper into distress. From December 2008 through February 2009, two short months, the amount of distressed retail assets went up 43 percent to $6.7 billion. More immediate to your world, lots of your existing tenants need help, less rent is being paid and retail bankruptcies are commonplace news. And even if you don’t know it (after all why collect tenant sales if you aren’t getting percentage rent) the underpinnings of centers are getting weaker and weaker as your tenants’ sales continue to suffer, eroding their ability to pay any portion of their rent. And let’s not exclude new tenants from the discussion. Remember when that girl or guy in high school promised to call you and never did? You thought that maybe your phone wasn’t working, right? Well, I have news for you, while denial may have been a perfectly good strategy in matters of high school romance, in matters of real estate, it’s a recipe for a world of hurt. So don’t bother sitting by the phone, waiting for any new tenants to ride in with a white hat,  pay big rent and rescue you. The reality is that they’re “just not that into you.” At least not for a while anyway.

If you are lucky, and so far you might not feel that way, maybe your loan still has some time until maturity. If not, forget about finding another lender to replace your current one; you are at the mercy of your current mortgage holder, who will treat you like some unfortunate character from a Quentin Tarantino flick. First, how much money and/or assets can you put up to secure your dwindling slice of equity. Then, they’ll want your cash flow (if you have any), and finally new loan reserves to cover lease-up costs, tenant improvements, free rent, etc. And for all of that pain and suffering, you get to pay some additional points, pay their legal fees, and low and behold, you get another 3 years before they take another chop at your financial statement.

So, now what? Though many of us seem to have suffered from some group amnesia as it relates to past down cycles (in the late 1980s/early ‘90s), real estate is a cyclical market. While each cycle is a little different, how to weather a down market is a fundamental part of sound investment planning; Not only is it survivable, but with proper planning, can be the starting point of creating enduring wealth in the shopping center business.

With the right asset management strategy and team behind you, you can minimize the impact of this recession (dare I say, depression), shore up your shopping center, strengthen your tenant base, and eventually, restore your cash-flow and long-term viability. After 25 years in the business, I have identified certain steps that are critical to pushing “prayer” down on the list of possible solutions:

1. Communicate — Communicate with your tenants, lenders and investors. Acknowledge the economic situation and what you plan to do about it. Be honest and realistic about your plans, but make clear that you are planning for a better day. Get to know your tenants. Ask them face-to-face how they are doing. Talk to their regional managers. Find out how your store compares to others in the chain and the region. Information is the new currency. Get as much of it as you can.

2. Control Your Costs — Re-bid everything. Every dollar is precious, whether it is yours or whether it is your tenants. Most vendors are very willing to work with you to reduce their costs to keep your business. We were able to lower our common area charges by over 10 percent while still maintaining a first-class environment in our centers. File tax re-assessments, get your insurance costs down, and make sure everything from your trash to your security is as effective as it can be. This is an easy way to get your tenants gross rent down, and not cost you anything.

3. Help Your Tenants — Rent relief is not help. It’s a band-aid. It might buy you some time, but it doesn’t solve the intrinsic problem, which is how to get sales levels to a place where they can afford their rent. You may think, “isn’t that the tenant’s problem?” Well technically it is, but unless you want to try to find a new tenant in this environment, think of the landlord/tenant relationship as more of a partnership. So partner, what can you do?

a. Market Your Center — often an individual tenant cannot afford to market themselves properly; but as a group, marketing is more affordable. We often support direct mail, newspaper advertising and cable advertising. We organize it, provide some level of subsidy, and then get the tenants to pay their share.

b. Center Promotions — Does your center have a lot of clothing stores? How about a sidewalk sale for back-to-school or a fashion show? Lots of Jewelry stores? How about a Valentine’s Day event? Work with the local community, let them use your site as a fund-raiser and help them promote your center. And if you haven’t had Santa parachute into your center with some elves, you haven’t given your retailers a proper kick-off to the holiday season.

c. Direct Tenant Assistance — Do you have a tenant with good products but poor business sense? Maybe your tenant has been working hard, too hard, and has let their displays go, or has not adjusted to a new competitor. This is where you can bring in a “secret shopper,” someone who poses as a customer and analyzes the business, before providing a report to you and the business owner. You can bring in a business consultant who helps analyze the business and acts as tenant advisors for 3 to 6 months. As that age old adage goes, give a man a fish and he eats for a day, teach a tenant to merchandise and they’ll exercise their 5-year option.

d. On-Site and Virtual Presence — Does your tenant have good signage? Are they on your Web site or do they have one of their own?

Seem like a lot of work? Figure the cost of finding a new tenant to replace a failed one, and you’ll likely conclude that the cost of helping your existing tenant is cheap in comparison.

4. Monitor Your Tenant Sales — Want to keep score? In our business the most important number you need to know is how are your tenant’s sales; namely how do they compare to prior years, what is their percentage of sales over rent and how do they compare to industry averages? We make sales reporting mandatory, and we diligently track and review them monthly. For some tenants, we have 10 or 15 years of sales history, which allows us to know how they’re doing, their sales trends, when they need help and when we should be talking to them about expanding (believe it or not, there are still expanding tenants).

5. Know Your Success Stories — Every center has them. Maybe it’s that local restaurant that has a really strong clientele and great fish tacos. Maybe you have a clothing store that has identified a real niche in the community. Or that gym that has attracted 8,000 members without much advertising. Know your stars and promote them. Make sure your leasing team knows about them and uses them in tenant recruiting. Make sure your other tenants know that it is not all doom and gloom, and some of their comrades are still thriving. Maybe they can learn from their successes.

We have many touch points with each tenant: Sales reporting on a monthly basis; monthly property manager-tenant interview; weekly tenant lunches; quarterly surveys and merchant meetings; daily security reports; and post-event marketing write-ups. If someone knows our tenants better than we do, it better be a close relative.

6. Control The Controllable — We know. The economy is bad. No one is buying. Unemployment is up. There is a lot that you cannot control, but focus on what you can. Are your exterior lights functioning properly at night so the center is safe and well lit?  Do all your tenant’s signs work?  Is your landscaping attractive and your paving in good shape?  By keeping costs down and making sure you’re making your shopping environment as attractive as possible, you materially increase your odds of success. This year we cut over $800,000 from operating costs, money that went back to our tenants, which they can use to market, buy inventory and, yes, pay their rent.

7. Financial Reporting – Understand your receivables. Do your tenants owe you money?  How much and why?  Make sure you perform timely financial reporting so you understand what is happening on a daily level. Time is not your friend. You need to deal with delinquencies quickly and make sure you resolve them. You also need to understand your cash-flow, both today and over the next 12 months, to determine how you are doing compared to your budget.

Seems basic, but you would be surprised how often investors get limited reporting that is impossible to understand and even harder to devise an action plan from. We generate monthly reports for every one of our properties, which includes the most up-to-date financials, tenant sales, tenant interviews and anticipated cash-flow impacts, just to name a few items. Every single employee on our management team reviews and approves these reports so we are all on the same page.

8. Work With Your Lender – You need to communicate with them (see #1) to make sure they understand the financial picture (see #7). Most importantly, you need to be honest and make sure to never surprise them. You are not the first borrower to be unable to refinance out a loan, have a tenant vacancy that is severely impacting cash-flow or need more proceeds to improve your center. You need to come up with a game plan, meet with your lender and share with them your vision. They don’t want your property back, but your loan officer also doesn’t want to have to tell his boss that he’s pursuing a workout with you unless you have credibility with the bank and a plan to move forward.

9. Hire The Right Advisors — Make sure you have a battle-tested team of professionals working with you at every level. It has been a long-time (over 15 years) since the real estate market has seen the level of stress that we are seeing today, and property managers, accountants, leasing personnel, marketing directors and attorneys can all add a lot of value — if they’ve been through this type of uncertainty before. But remember: In today’s environment, bigger isn’t necessarily better. Don’t just hire a firm that was around in the “old days” or has a well known logo on their business card. A lot of people can do the job of property management at a “B” level, but very few can take it to an “A.” The old saying, “There is no substitute for experience” has never meant more than it means now.

And keep in mind that hands-on management and sound leasing strategy are inter-related. I cannot tell you how many times someone comes to us and asks if we can do leasing without management. It isn’t effective, and never less so than today. Does your leasing team know all the strengths and weaknesses of the center? Do they understand which space needs the most attention? Or is their goal to maximize their commission with the least amount of effort? You need someone who looks at your center as a whole package, not just as a leasing assignment.

10. Each Shopping Center Is Like A City — Shopping centers are not inanimate objects. Much like a city, they live and breathe and have their own distinctive personalities with little quirks. And because of this, every day, you, as the owner, or in this case, the mayor, can constantly alter the message you provide to the consumer to give them a reason to come back. Unlike an apartment building, office complex or industrial center, you can review sales, visit stores and interact with consumers on a daily basis to gauge if your center is positioned correctly in the marketplace. And unlike those more static investments, you get the opportunity to do it all again tomorrow.

Finally, beware of false prophets, whether it be Rasputin or Alan Greenspan. In times of crisis there are always those who’ll attempt to profit from providing answers whether they’re reasoned or not. There are a lot of firms claiming to have “special shopping center work-out divisions” or “company retail assessment providers” these days. Some of these providers have real experience in overseeing retail for many years, but let’s be honest, most don’t.

There aren’t easy answers out there, but with the right strategy and the right team, you may still be happy you sold that 18-unit apartment building to pursue the dream of being a retail giant.

Sandy Sigal is the founder and chief executive officer of NewMark Merrill Companies, a Woodland Hills, California-based company which specializes in the development, acquisition, leasing and management of shopping centers.

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.