Some Smaller Retail Real Estate Firms Have Thrived in the Downturn
Nov 3, 2009 1:08 PM, By Jennifer Popovec
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.
Stonemar Properties has been working with its tenants' construction vendors to try and reduce the cost of buildouts.
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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