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Some Smaller Retail Real Estate Firms Have Thrived in the Downturn.

The double whammy of the credit crunch and the recession doomed some of the largest retail property owners in the United States. The most high profile victim has been Chicago-based REIT General Growth Properties Inc., which is now working its way through bankruptcy. Meanwhile, several of Opus Corp.'s subsidiaries—Opus East, Opus South and Opus West—filed for bankruptcy and are being wound down. Other large firms have defaulted on mortgages, been forced to sell some assets or opted to turn their keys over to lenders on some properties.

With large firms being brought to their knees by the grim climate, has it played out even worse for smaller retail real estate players? Not necessarily. During the days of cheap and easy capital, many small owners did get in over their heads with short-term debt, high loan-to-value ratios and interest-only loans. Today, owners up to their necks in debt with maturities looming are so strapped for cash that they don't even have the money to properly maintain properties, let alone the cash to pay commissions and fund tenant improvements to bring new tenants to their centers.

But the situation hasn't been disastrous for all. Experienced operators, regardless of size, have weathered the storm. Furthermore, the most nimble of small owners have taken additional steps to ensure that they not only will survive this downturn, but thrive when the industry rebounds. They've conserved cash, reallocated personnel, initiated aggressive leasing and tenant communication efforts, and streamlined operations and property management. And, they may have some inherent advantages over larger owners, particularly when it comes to changing course and making decisions.

Moving quickly

While size can be an advantage—especially when it comes to negotiating deals with national retailers and vendors and to securing capital—small owners say there are also upsides to maintaining a small and lean operation. In fact, where you stand today depends less on the size of your firm and more on the strength of the company's before the downturn took hold. How much debt the firm had, the quality of the portfolio, and management acumen are what matter most, according to Rich Dube, president of Tri-Land Properties Inc., a Westridge, Ill.-based owner with a portfolio of 16 shopping centers.

"These big companies are like big battleships that can’t turn on a dime, but a small company can be like a [patrol torpedo] boat, changing course quickly because it's agile and flexible," adds Howard Paster, president of Paster Enterprises LLC, a St. Paul, Minn.-based company that owns 12 grocery-anchored shopping centers throughout the Great Lakes region.

Paster says large companies have a hard time making changes quickly because there are so many layers of infrastructure. Smaller companies, on the other hand, usually offer tenants and vendors more direct contact with decision makers.

The importance of changing course quickly cannot be overstated, especially since market conditions are so volatile and continue to shift so rapidly. "Because of our size, decisions work themselves to the top of the company fairly quickly," adds Adam Ginsburg, co-chairman of GDC Properties LLC, a Hawthorne, N.Y.-based shopping center owner. "We have a very flat organization and can pull the trigger faster than those that have to go through management layers such as investment committees." In addition, GDC has been able to hang on because of low leverage, long-term loan maturities, and cash reserves.

Washington D.C.-based Combined Properties Inc. has also been nimble. It began stockpiling cash in 2007 after its president, Katherine Roberson, began to sense undercurrents of distress in the economy and the capital markets. Because of its low leverage, Combined Properties, which owns and manages a portfolio of 37 properties totaling 5 million square feet, has been able to pull money out of a number of centers to fund its ongoing operations. And the company shifted its attention away from acquisitions and redevelopment to focus on cash preservation.

Next page: Personal attention

Personal attention

Some tenant brokers who work with owners of all types say that working with smaller firms in some cases has proved easier in recent times precisely because of such companies' abilities to move quickly.

“I don’t have to deal with big committees or outside consultants that are disconnected from the properties,” says Jim Kovacs, a managing director in Colliers Retail Services Group who specializes in retailers with footprints ranging from 5,000 square feet to 30,000 square feet. “Even though larger companies often have local leasing teams with a degree of latitude, the real decisions are made at a higher level and everyone wants to chime in.”

Kovacs also argues that small owners have a better handle on local market conditions because their properties are usually clumped together regionally, which allows owners to pay more attention to each center and visit them more frequently. Some owners even shop at their own centers, he notes.

Moreover, Kovacs believes that small owners are more concerned with vacancies and will work harder to fill them. “Each vacancy represents a greater percentage of their centers, so they have motivation to push deals to completion,” he says. “Small owners pay attention to every single vacancy.”

And in Kovacs’ opinion, larger owners tend to clash with retailers more often than smaller owners. “Retailers tend to have various procedures to get deals done, and small owners seem to understand that better and are more willing to live with those procedures,” he says.

Frank Bullock, executive vice president of SRS Real Estate Partners, agrees with Kovacs. “The internal decision-making structure for small owners is much closer, which makes communications between tenants and their brokers easier,” he notes. Another perk for small owners is that the ones who own their properties can pretty much do anything they want with them, and they don’t have to confer with a lot of different people.

Streamlining operations

Cash reserves are important for every retail property owner, but especially important for small owners that cannot access the public markets or establish joint venture partnerships with institutional investors.

Today, many small owners are dipping into those reserves to replace revenue lost from increased vacancies and falling rents and net operating incomes. Dube, of Tri-Land Properties, says he's been willing to reallocate bonus money and other funds to maintain centers, to retain tenants and to attract new retailers.

"Even though it's taken some money out of our hide, we're not going to let our centers look like they're going through a recession by not maintaining their appearance," Dube says.

Boca Raton, Fla.-based Woolbright Development LLC has focused on reducing its operating expenses to create a pool of funds for rental relief, according to President Duane Stiller. The company, which owns more than 25 grocery-anchored and power centers throughout Florida, got rid of extra dumpsters, used its light timers more effectively and dug wells to provide water for landscaping irrigation.

"We found savings we never thought existed and ended up saving $1 to $2 per square foot for every one of our tenants, which translates to a 5 percent to 10 percent reduction in rent," Stiller says. "We're not cutting back services, but we are being better stewards of our money."

Similarly, Paster has managed to cut operating costs without sacrificing upkeep by going back to the company's vendors and renegotiating contracts for landscaping and janitorial services, among other things. He says the common area maintenance costs for his centers are the same as last year, if not less.

Meanwhile, Woodland Hills, Calif.-based NewMark Merrill Cos. cut its budget and reduced its CAM charges by 10 percent last year—without modifying its services—by re-bidding its vendor contracts, revamping its insurance coverage and disputing its property tax assessments. President and CEO Sandy Sigal, who sits in on every single budget meeting, says he hopes to cut another 10 percent from the firm's overhead this year.

Next page: Helping Existing Tenants

Helping existing tenants

But there's one expense Sigal refuses to cut: marketing. In fact, the firm, which owns or manages 5.5 million square feet of shopping centers in 30 cities, has upped its marketing budget by 10 percent to allow for more on-site promotion and customer contact.

Moreover, some smaller firms have been more forgiving in granting rent relief. Columbus, Ohio-based shopping center REIT Developers Diversified Realty Corp., which commands a portfolio that exceeds 100 million square feet, has taken a hard line on concessions. It has received more than 900 requests in 2009 and only granted 41.

In contrast, NewMark Merrill has received 150 rent relief requests and in roughly 30 of the cases it has worked with tenants. As the company considered the requests, it found that 60 were opportunistic—requests made only because other tenants were asking for relief. Of the remaining 90 tenants that requested relief, about half of them did not provide the financial and supporting documentation the NewMark Merill asked for. Roughly one-third of those that did provide documentation did not receive relief because "it wouldn't have helped," Sigal says, and the rest received relief in the form of rental abatements or concessions.

While small owners are paying more attention to their existing tenants, they've also gone on the hunt for new retailers, focusing on local operators and reevaluating commission and tenant improvement structures.

During the boom, retail expansion was driven by national retailers. Large owners benefited from this expansion because they boasted strong relationships with national retailers and meet demands for new space with multiple at centers at once, simplifying the leasing process. In contrast, small owners had little leverage with the large chains and struggled to build relationships with national retailers.

Today, the tables have turned because national retailers are not expanding at the same pace they were, and some are even contracting and closing stores. Local retailers, in the form of both franchisees and mom-and-pop players, now constitute the bulk of leasing activity in neighborhood and community centers, Paster notes, adding that he's signed half a dozen leases in the past 90 days with new business owners, including a 2,000-square-foot running store at Moundsview Square in Moundsview, Minn.

"Larger players are struggling to lease their inline spaces because they’re not pounding the pavement for local tenants," Paster says. "Small owners are going to be better positioned to take advantage of this tenant group because they know where to find them—they have local relationships and are ingrained in the community."

Small owners are also trying to sweeten the pot for tenant reps. Las Vegas-based Territory Inc., for example, has modified its commission structure to attract more broker-generated deals, according to Terri Sturm, the company's CEO and founder. The firm, which owns a portfolio of neighborhood and community centers totaling 3 million square feet, now splits a 5 percent commission between listing and leasing brokers as opposed to the $1 per square foot commission it used to pay. Moreover, the company is negotiating broker bonuses case-by-case, Sturm says. "Ninety percent of our deals come in from outside brokers, so we have to be more competitive with our commissions and bonuses."

Small owners are also approaching tenant improvement (TI) allowances differently. Combined Properties, for example, is willing to help potential tenants finance their businesses by offering larger TI budgets. "If we see a strong local tenant in one center, we try to help them expand into a new market by offering creative leases—shorter-term deals and larger TI packages," Roberson says.

However, small owners are still being careful with their TI dollars. "We don’t want to give away a decent amount of money for a tenant that is going to be gone in a couple of years," says Emmet Austin, chief investment officer of Stonemar Properties LLC, a New York City-based company that owns nine power centers. "Recently we've been working with our tenant's construction vendors to really drill down and see if they can get their build out done for less."

Austin says Stonemar Properties' portfolio has suffered vacancies from dark inline space and the bankruptcy of three Goody's stores. Occupancy is hovering at about 90 percent, and the firm has had some luck backfilling space at higher rents.

"Things have gotten worse than we expected, but we’re keeping our head up, and we’re focused on the overcoming the challenges," Austin says. "If we can get through the next six to 12 months, I expect things will improve."

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