Shopping Center Owners, Get to Know Your Tenants!

There are different types of shopping center owners. Some just pay attention to the profit and loss statement and some are also concerned with the overall health of the shopping center. Regardless of a shopping center investors ownership style, and if there is an in house management or a third party management company, it is important to know the tenants.

Shopping center owners should have a finger on the pulse of how every tenant is performing. This can be done in a number of ways but the best way is for the shopping center owner to have a dialogue with each tenant. This can be accomplished directly or indirectly through the management company.

Why is this so important? Knowledge!

Shopping Center owners and tenants are in this together. Regardless if the tenant is a mom and pop or a national chain, a dialogue will help a shopping center owner to know if the tenant is doing well or struggling. A good dialogue with the tenant will help to ensure that a landlord is not caught off guard by a tenant default. Often times by having the open dialogue, a tenant feels more comfortable in asking for a month or two of rent abatement to get themselves through a difficult economic time. And as a shopping center owner it makes more sense to fore go a couple of months of rent as opposed to having to shell out 30-40k in tenant improvement dollars for a new tenant.

Tenants speak with other tenants. If tenants are happy or unhappy about their landlord they will let other tenants know. This works both ways. If a landlord is slow to respond to maintenance requests or if the tenants don't have the ability to reach the landlord they will let everyone know how dissatisfied they are. They will speak with other tenants in the shopping center as well as tenants they know in other shopping centers to see if the grass is greener at another shopping center. But if a tenant is able to pick up the phone and reach the landlord or the landlords management company and the requests are handled in a timely manner then those tenants can become the best advertisements to potential future tenants.

What about national tenants? National tenants can be a bit harder to deal with than a small independent retailer. But ultimately there is a person who is responsible for the store within each shopping center. Typically national tenants have real estate managers who are knowledgeable about the performance of the store within their territory. Get to know these real estate managers. The benefits can be much more than just keeping up with a single stores performance. If you own more than one shopping center, having a relationship with the real estate manager may also help to get them into a space in a different shopping center.

"I own a ton of shopping centers, I don't have time to contact every tenant." This may be the case, but there is someone in the organization who is responsible for the accounting, maintenance, and tenant relations that should be able to perform these duties. Whether it this person is in house or a third party manager, a shopping center owner should receive a quarterly update on how each tenant is doing, potential red flags, and possible solutions to these problems.

This is a very simple concept. Shopping center owners or managers should speak with the tenants once a quarter and ask questions, a lot of questions. How is business? How is the foot traffic in the center? Are the tenants happy with the visibility/signage or is there something the shopping center owner can do to improve it? How are the other tenants in the shopping center performing? Are there outside factors in the community that are adversely effecting the shopping center?

All of this sounds basic, but all to often I speak with the tenants of shopping centers that I am selling, and they are happy to be done with absentee ownership whom they have never met and are unreachable or unresponsive. Also understand that there are those tenants who look to take advantage of situations or tend to have unreasonable expectations. But communication is always key in every relationship and it is no different in the relationship between a shopping center owner and the tenants.

Net Leased Retail Investments and the Economy

Wow! Unless you have been under a rock the past week, you have heard the news of the S&P dropping the United States credit rating from AAA to AA+. Regardless of your view about the validity of that decision, it came at a bad time. Commercial real estate investment volume was picking up, deals were getting done, and money was slowly but surely coming off the sideline. I am not an economist, but I can't imagine that the events of the past week strengthen investor confidence. At best, I imagine investors taking a wait and see approach. At worst, money will remain on the sideline until some of the questions that went unanswered by the government with the latest debt ceiling increase are finally answered. I believe what investors really want to know is how will the government tackle the long term debt issue. Will there be an increase in taxes, if so, on who? Will there be an overhaul on entitlements, if so, to what extent. And these are just a few of many issues that will have a huge impact on our national economy for a number of years.

So what now? I don't really have a solid answer. My degree was not in Economics it was in Political Science, and I don't remember the lecture on the two party system that was more worried about election positioning, than making sure that the national economy is set on the right path for sustainable growth.

As a commercial real estate professional who focuses on Net Leased Retail Investments I have to analyze the events of the past week and judge how it will effect the Net Lease Retail Investment market in the coming months.

Investors: Basically Investment fundamentals will stay the same, investors will continue to target national credit tenants with a good balance sheet. Those retailers that are of the highest ratings will be sold at a premium. Value add investors will take a slight pause but will make moves in markets with solid and diverse economic drivers. Grocery anchored shopping centers will continue to be a major target.

Sellers: Sellers will need to have a good understanding of the market. Employ the services of a seasoned commercial real estate broker to properly position the asset within market. Sellers need to understand that the asset's value is at the mercy of the market, which is nothing new, but the market maybe a moving target. In uncertain times a good commercial real estate broker is worth their weight in gold. They will have their finger on the pulse of the current market, understand the direction of the current market, they will also know the most active buyers in the current market. Be wary of the brokers that aren't willing to fight for a purchase price, they probably either don't know how to price the asset, or just don't care, and just want the listing. Be aggressive with due diligence periods, it doesn't take a whole lot of time to get all of the necessary inspections done on a property. Limit or don't allow due diligence extensions. Be even more aggressive with the time period to close after the due diligence period. The old saying is that time kills deals, take this to heart. As we have seen, things change quickly, and the less time a deal is exposed to the economy around it, the better.

As always this is not going to be anything earth shattering for the seasoned investor or broker, but when you here the words "first time in history" you are in uncharted territory. So all comments welcome.