Owners need to be versed in strategies and options when dealing with troubled assets.
Last year will go down as one of the most challenging financial years in recent history. Investment banks were the epicenter of the crisis as billions of dollars' worth of toxic assets clogged balance sheets. And retail property owners faced mounting problems as asset loans neared maturity. A rise in the number of retailers filing for bankruptcy only made things more difficult and many properties are now performing well below expectations. The situation has had an inevitable conclusion — increasingly, retail properties are falling into distress or receivership.
Retail has been the first commercial real estate asset class to plunge into the distress zone. Other categories like land, hotels, multifamily and office properties face similar pressures. But retail — hit hard by both the drop in consumer spending and the credit crunch — is undergoing an acute contraction. Enclosed or regional malls, because of their reliance on discretionary spending, pose the highest risk to lenders. Strip centers, built on necessity retail, are less hazardous for lenders. But they will eventually follow suit.
Given the picture, what preventative steps can owners and investors take to avoid problems? First, it is important to conduct an overall assessment of the stability of the property. How is your net operating income (NOI) holding up? Do you have high-quality leasing and management specialists on board? Are they doing deals in line with market conditions? Is the property being maintained efficiently and effectively?
Unfortunately, for many owners, it's already too late. Either fundamentals have eroded too much or debt is coming due. In this case, receivership may be the best option. A receiver's objective is to help stabilize a property and enhance a center's marketability for a possible future sale.
Property managers have to act fast; they often have two to three months to turn a property around. The first step is to assess the property and check its day-to-day operations: Are bills being paid? Is the property being well maintained? Which retailers need to renew? Firms should scrutinize everything from leasing trends, janitorial duties, landscaping and security to financial management and procurement processes. Also, ask tenants what they need to stay and which additional retailers would enhance business.
But receivership is not just about property management. Firms also need to have investment sales and real estate banking capabilities in order to accurately assess the current value of the asset.
Thinking externally is also important. Rumors about the health of a property can flood the market. So it is essential to communicate to local consumers that the asset is still a major part of the community.
Increasing the NOI is the end goal and to do this creative thinking is a must. Inventive strategies can include incentives to retain and attract retailers and creating the right mix of merchandise at the mall. Encouraging specialty leasing at the property can bring a new perspective for consumers. Using empty space creatively can also add to the property's income. Leasing for sponsorship, art exhibitions or even as classrooms are some ways to use space.
It is also important to chase dollars by streamlining administrative processes, searching for efficient, energy-saving techniques and checking lease terms to ensure accuracy. For example, at Jones Lang LaSalle, we have a national purchasing program in which resources can be provided at a discount rate.
As we see more fallout from the ongoing economic turmoil, we are also seeing some light at the end of the tunnel. Consumer confidence is finding its pulse again, albeit slowly, and we expect to see further signs of life as early as the third quarter. In the meantime, we can endeavor to help distressed properties come back to life as soon as possible.