In today's tough environment, perhaps the single most important thing an owner or manager can do is maintain occupancy levels.
It's obviously critical to have paying tenants to keep net operating income at established levels. It's equally essential if you have your sights set on selling a property. Investors are poring over properties before committing. They're looking especially hard at who the existing tenants are, how long they are committed for and what rents they are paying. If a prospective buyer suspects a tenant or two might be troubled and is a candidate to exit theirearly, that can be a major red flag — especially if the tenant is paying market or above-market rents that would be tough to match in today's leasing environment.
Tenant retention is an incredibly touchy subject as few companies we reached out to this month were willing to share trade secrets on what kinds of efforts they are mounting. That's because when most people think of helping tenants, it automatically triggers the concept of concessions and rent reductions. No one wants to admit to that. Anecdotally, it is clear that there is some of this going on. But to us that's somewhat besides the point.
Ultimately, concessions, rent reductions and rent extensions are not the dominant tactic owners and managers are adopting. Instead, proactive owners are trying to avoid situations (i.e., declining sales) in which tenants need to ask forassistance. They are focusing on doing whatever they can to help retailers meet or exceed their goals. As a result, mall marketing directors are arguably busier today than ever before. Their job is to generate as much traffic as possible in an environment where consumers are cutting back on discretionary spending and conserving gas by making fewer trips to the mall.
Another focus is redevelopment. Many REITs and other experienced managers know that keeping a property fresh and adding new amenities can generate buzz and keep people coming. In a similar vein, albeit on a much smaller scale, it's also important to not slouch on property maintenance. Making sure properties are clean and slathered in fresh coats of paint and that all the lights are on may sound like basic things. But they send a signal. And any edge you can get in terms of keeping consumers happy ultimately is what's going to serve tenants.
Some of this may sound like property management 101. The reason it's important to lay it all out, however, is that there's another issue that hangs over the retail real estate sector — experience. It's been a long time since the sector experienced a retail market like this — at least since the early 1990s. There are a lot of pros that haven't faced this sort of challenge. This market will test the mettle of the layer of management that came into the industry in the past decade.
Even more worrisome is that throughout the most recent boom a lot of money poured into real estate that had very little experience owning and operating shopping centers. Their reaction may be to cut costs. What's that got to do with you as long as you do all the right things? It's simple. It's the same as owning a house on a block with a derelict neighbor. If you're next door, your property value goes down too. A decrepit center next door can also drive traffic away, in spite of your best efforts.
That's why, ultimately, we think it's in the interest of the industry to share best practices. There are always situations where it might be more productive to give some tips. We think this is one of those times.