Some Smaller Retail Real Estate Firms Have Thrived in the Downturn
Nov 3, 2009 1:08 PM, By Jennifer Popovec
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 Enterprises, which owns 12 properties including Crystal Town Center, has been able to react quickly to changing market conditions.
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.
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