T
he economic recession is demanding a renewed focus on the fundamentals of retail real estate that drive property performance and enhance long term value.
Asset managers are increasingly reliant on their leasing and management teams to be more creative and think more strategically about how to trim expenses and increaserevenues without sacrificing the future.
To explore the new dynamics between ownership and their property teams, PLACES initiated a series of interviews with leading asset managers at some of the largest investment management firms in the world. The dialogue clearly pointed to an increased consciousness of all of the relevant traits of a successful property team.
New Level of Dialogue
Daniel Braver, Executive Vice President, U.S. Portfolio Management at Heitman, highlighted the increased complexity of today's environment and described how the tone and tenor of the relationship between ownership and management has evolved. "Rather than a [property team] simply accepting the facts and circumstances presented to them and asking ownership for decisions, we demand a reasoned explanation of alternatives on how to handle a problem and a strong recommendation to ownership as to how a particular matter should be addressed and communicated to tenants," he said.
Braver's sentiments reflect the importance of having a veteran team in place with members who have experienced downturns earlier in their careers. Rising vacancies, declining values, fearful tenants, and dwindling budgets are not new to retail real estate.
Short Term Versus Long Term Leasing
On the leasing side, experience needs to be balanced with creativity. Joe Lipuma, Senior Asset Manager of DRA Advisors LLC, said "there has been a greater focus on the leasing team's ability to ‘think outside of the box' on chronically vacant space, as well as newly vacated anchors." Although Lipuma is sensitive to the current environment and admits it is not an easy challenge, he states they "value the team that can achieve short term goals that continue to provide cash flow while not compromising our overall long term leasing goals for the center."
Temporary stores or pop-up stores are one way to recapture lost revenue from a vacating anchor or other store. While they can certainly provide cash flow in the short term, selecting a concept that does not fit into the fabric of the center can hurt its appeal to shoppers and may even cause conflicts with other tenants. It is critical for the leasing team to understand the importance of thinking long term while seeking short term remedies.
Leasing representatives must also think long term when negotiating traditional leases and not feel tempted to "give away the store" while attempting to secure new deals. There is a sense among many industry players that the frenzied pace of leasing in recent years gave too many concessions, including dark store clauses, expense caps, and exclusions. Many of these types of provisions are only now revealing the errors in judgment.
Asset management teams must now fight tooth and nail regarding the economies of today's deals. They will not mortgage the long term future to cover a short term "bump in the road."
Management's Role
More often, owners and management see lease renewals as a key component in maintaining stability and preserving asset value. While the leasing team needs to mange the negotiation process, asset managers view the property management team as essential to laying the foundation for successful agreements.
One of the biggest areas of concern for tenants is common area maintenance (CAM) costs and other expenses passed on to them. Steve Schnur, Senior Vice President at LaSalle Investment Management, says "our merchants are constantly comparing our shopping centers to our competitors in respect to expenses and charges." He sees managing vendor relationships and using portfolio-wide presence to negotiate discounts and priority service levels as an essential part of keeping down costs versus competing centers.
Keeping expenses down is especially important in today's environment. Management teams that draw upon national operating platforms enjoy the ability to negotiate volume discounts for energy, maintenance, security, marketing, and waste disposal. These savings keep CAM costs low and allow rental rates to strengthen. In cases where leases provide for fixed CAM expenses, these discounts contribute directly to the bottom line of a center.
Schnur relies on his management teams to be extremely engaged with the merchants. "They have to be aware and diligent in handling accounts receivables and collections and able to identify any merchants who may default or go dark," he states.
Local Leasing
When tenants do go dark, the leasing team is vying for far fewer national tenants still expanding. Increasingly, the leasing team is now seeking to attract local or regional tenants. Local expertise is clearly an important trait and one that every asset manager seems to be emphasizing. It is especially important for smaller centers.
DRA's Lipuma also sees leasing expertise, in particular formats such as lifestyle centers or regional malls, as an important component in gaining bargaining power with tenants. He says, "we often look to our leasing team to achieve leverage by working on several deals at various properties, rather than single, one-off deals."
Other asset managers say there is a disturbing trend in how centers are assessed and valued as it relates to leasing. There is a shifting of focus from tenancy mix to total return and an over reliance on the financial returns to determine the health and success of the centers. A poor tenant line-up may look great on paper, but the asset's long term value potential can be far weaker than a competing center with the right tenants getting slightly lower rents.
Communication
Asset managers also stress the importance of remaining in close contact with the property team in the current environment. They prefer to stay very close to the asset and to obtain regular and constant feedback. Since we are in a very difficult environment, it is even more important to stay ‘plugged-in' to the asset.
For well-oiled teams, communication should come naturally. There should not be any hesitation to share ideas and discuss difficult issues. Asset managers are realistic about property-level challenges and our interviews revealed that fact. Instead of shying away from the challenges, the best property teams, they say, are the ones that take a proactive approach. All agreed that new avenues and changes must be considered to reflect a commitment to value preservation and enhancement.
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