Recently I was approached to look at a large retail shopping centre in a suburban location; specifically, to resolve leasing issues and vacancy problems. The property was some 30 years old, and the current owners were consistently ‘aggressive’ in setting higher rentals and protracted lease negotiations.
Interestingly, the landlords, in this case, were blaming everyone but themselves for poor investment performance. Their properties were in decline.
Some landlords can’t see the ‘wood for the trees’ if you know what I mean. The tenant mix, in this case, was being destroyed.
A fair rent is a fair market-based rent
Now, don’t get me wrong here; a fair rent is always a reasonable charge to raise for shop occupancy. Its when things go too far the other way with the landlord escalated higher rents that the retailers of the property feel the impact.
It is very hard for a retailer (which is usually and simply a small business) to walk away from something that they have put tens of thousands of dollars into and hundreds of hours of personal work.
Many tenants try to live with the ‘financial pain’ of high retail rentals in the hope that things could get better with a lift in sales. If, however, the landlord is not supporting the promotion and presentation of the property, then everything gets quite difficult. The customers, in this case, were not coming back to produce that ‘boost’ in sales.
The fixed percentage increases in rent reviews today can also be a problem. The days are gone of 5% pa increases although some landlords would like to achieve that. In this changing retail property market, 3% is commonly still too high, and CPI is a fairer equation for all.
It is better for a landlord to take a lesser rental from a tenant and or the tenant mix, and thereby achieve occupancy stability for the long term. That’s where the landlord and tenant partnership is so important.
When I look at any retail property, I like to investigate all the factors of the property before I recommend anything. To understand the basic facts in this particular situation, I asked plenty of questions and talked to the landlord, plus the customers and tenants to the property.
What did I find out?
I found out that the landlord had owned the property for some ten plus years and over time they were slowly ‘killing’ the tenant mix through pushing rents up to the detriment of the existing tenants and their ability to trade. This property was one of a few shopping centres owned by the ‘family’ as part of an investment portfolio. The landlord with a large portfolio had no great financial pressure, but the tenants had plenty.
In this case, and because of the high rents, the existing tenants had lost their ability to produce a reasonable net income from their businesses. The downward spiral in the tenant mix was well underway; tenants were talking between themselves, and they were consistently unhappy. The landlord at the same time (not wanting to spend money on the maintenance of the asset) was allowing the property presentation to decline. The customers could see all that happening in degraded property presentation; customer interest in the property was also in decline. The auto tellers (ATM’s) were looking to pull out from occupancy at lease end. When that happens, you do have some real proof that a property is in decline with customer interest.
It is no secret that the retail part of the property market is changing; landlords need to be careful as they seek to improve property performance. Retail shopping doesn’t go away; it just changes. Today there is a shift in customer shopping patterns due to online sales and the impact of internet products and services. Shopping centre owners should respect the changing property segment for its complexity, strengths, and weaknesses. A good quality retail property will be either a ‘destination property’ or a ‘convenience centre’. There is no ‘middle ground’.
In this Case?
So, what was the outcome in this case with this shopping centre? This is what I found out after investigating the property:
- High and escalating vacancy factors
- Low levels of new tenant enquiry
- Tenants struggling to exist and pay rent on lease rent
- An increasing level of ‘pop up’ tenants to fill vacancies at lower rents
- Solid levels of competition in the local area from other retail properties
- Negligible local area marketing to boost retail sales and customer interest
- Poor tenant relations with the landlord – lack of respect and trust on both sides
- Uncompleted lease renewal negotiations with sitting tenants
- Low levels of property maintenance and poor presentation factors in the common areas
- A declining interest from customers locally in the property
- A supermarket that was not improving sales and was worried about the future of growth
- A landlord that was failing to get involved with the anchor tenant and its performance
What would you do with a property like this? Would you fix it, or would you let things ‘stagnate’?
So What Did I Do?
I chose to walk away from getting involved. A good move I think; there no point in wasting proven and intelligent investment strategies on property owners that continue to destroy a shopping centre and the tenant mix for the sake of aggressive rental payments.
What will happen now? It will become more of a ‘distressed asset’, and eventually, most of the tenants will probably leave. Will the landlord soften their stance on rents? They will likely have no choice if they want some reasonable chance of a property ‘turn-around’.
There is a key message here for shopping centre owners. Respect the important balance between customer engagement, leasing, property maintenance, the tenant mix, retail sales, property marketing, and anchor tenant support. That is the retail shopping centre equation to carefully nurture and grow if you want a successful shopping centre as an investment. Success is possible for any property investor if all elements of retail property performance are ‘balanced’.