Retail landlords getting creative to help, keep, attract tenants

Filed under: News | Tags:,
Falcon Ridge Shopping Center got a makeover, including these roofline additions.

Falcon Ridge Shopping Center got a makeover, including these roofline additions.

Sisyphus, the mythological Greek figure who was condemned to repeat forever the same meaningless task of pushing a rock up a mountain, could symbolize the plight of today’s commercial landlords.

Their situation might not be quite that impossible, but during a recession in which consumers dramatically cut spending, they are facing their own version of the mythical boulder.

Year to date, almost $60.5 billion in commercial real estate assets have fallen into default or delinquency, according to a report from Real Capital Analytics, a New York City-based research firm. Overall, the estimate is closer to $108 billion of distressed assets — in default, foreclosure and bankruptcy — that involve 1,420 retail properties worth $31.1 billion.

Empty spaces

Locally, vacancy rates in the city’s 256 shopping centers have risen to 9.5 percent, or about 1.8 million square feet of direct lease space, based on Turner Commercial Real Estate’s second quarter 2009 Commercial Availability Report. The area’s lowest vacancy rates were recorded during 2006, during economic boom times.

Today, actual vacancies are closer to 10 percent, Turner said, adding that at least 90,000 square feet of sublease space remains available.

Especially hard hit have been retail property owners who have faced an increase in stores and restaurants “going dark.”

Since May, for example, several Pikes Peak region restaurants closed their doors, including Sien Sien, Ocean’s Grill, Plate World Cuisine and Flavors. The Citadel mall and Chapel Hills Mall both have seen several large retail tenants shutter operations, and southwest Colorado Springs’ Broadmoor Town Center, which was filled to capacity until last fall, saw the overnight departure of gourmet foods vendor Par Avion and more recently, the closure of an Academy Carpet store.

In a story for www.TheBusinessInsider.com, “Commercial Real Estate: A Ticking Time Bomb,” reporter David Bodamer wrote: “We got the June same-store sales data today. Sales came in down between 4.3 percent and 5.1 percent, depending on whose numbers you look at. Reis (a commercial real estate research company) also released new numbers on shopping center and regional mall vacancies showing vacancies have hit 17-year highs.

Landlords who face debt refinancing are finding formerly eager underwriters and banks now unwilling to re-up their loans with the same generous terms allowed during the past. Instead, the banks require new appraisals that result in lower valuations — the result of a two-year recession and cutbacks in consumer spending. And with less equity, many banks are requiring owners to come up with additional cash.

“The old lending requirement of 25 or 30 percent down is gone,” said Sierra Commercial Real Estate broker Mark Useman. “Today banks want 50 percent or more participation by the owner, and real honestly, in this economy, a lot of owners just can’t come up with that kind of cash.”

“Loans originated at the height of the market were done at near 100 percent loan-to-value ratios and underwritten with generous assumptions on increasing occupancies and rents,” wrote Elaine Misonzhnik for www.retailmag.com, pointing out that during the past two years commercial real estate values have dropped and fundamentals have weakened. “Rents and occupancies are now dropping quickly, not rising. On top of everything, a major source of financing, the commercial mortgage-backed securities (or CMBS) market, remains locked down.”

Up the hill

For landlords, the dilemma is twofold: do you help a tenant by offering upfront rent concessions in exchange for future a lease extension — or do you sit back and wait to see whether the same tenant might go bankrupt?

Some are not waiting for the economy to peel away valuable, but struggling tenants. Instead they are implementing pre-emptive strikes — programs designed to support or keep good retailers, restaurants and storefront tenants. Of course, such programs subtract revenue from the bottom lines, putting some properties in jeopardy or forcing deferred maintenance on already stressed buildings.

When that happens, shopping center owners might, themselves, end up under a lender’s scrutiny.

Fortunately, more often than not, lenders are willing to work with their commercial real estate owners.

“Most properties are leveraged to some degree. A smart landlord will stay in touch with his lender, and let the bank know what steps are being taken to sustain occupancy,” Useman said, adding that he’s worked with locals like Wells Fargo or American National Bank. “They usually don’t want the real estate.”

All in this together

Such proactive measures and good communication work, for the tenant, the landlord and the lender.

When an owner has lost tenants and is facing his three- or five-year loan review, Useman said he asks lenders: “What are you doing for your landlords? Sometimes they refer to it as ‘working with assets.’ Bottom line, the question is: Do they want the asset back? Will they do better by taking it back or by working with the current owner?”

He tells tenants who have seen retail sales decline that they need to come up with a win-win business plan.

“Instead of threatening to just go out of business if they can’t get lower rent, they could ask for an extended lease, for example, where rent can be discounted in exchange for a longer contract,” he said. “A lot of tenants don’t think about their landlord’s accountability to a lender. Most can’t give rent concessions without permission from their bank — and not all lenders are allowing concessions.”

Tales from the front lines

Useman said the next few years might be a “shakeout period”

“Newer centers like the Monument Marketplace, for example, are fortunate,” he said. “They serve a specific geographic area. Down on South Academy (Boulevard) in a lower income area, it may be tougher.”

Matt Craddock of Craddock Cos. owns the remodeled and re-tenanted Mission Trace Shopping Center at Hancock Expressway and South Academy, now 90 percent occupied. During the past two years, he estimates he has spent almost $2 million in upgrading the center’s exterior, expanding parking to accommodate a 50,000-square-foot retailer and working with tenants to increase visibility and traffic.

“We do a lot of work with our tenants,” he said. “When the Alternate Source expressed interest in moving back, we talked with Carl (Hatten), the owner. He was going to do a build-to-suit near Academy and Drennan, but he ended up becoming a part owner in his current building in our center so his rent is significantly less. It took three or four years, but I filled a huge vacancy with a great tenant.”

Craddock said he has renegotiated all Mission Trace leases during the past two years and on at least 20 percent, asked for no rent increases.

“If I had jacked up the rates, they would have left,” he said.

Likewise, Broadmoor Town Center and Academy Shops developer/owner and broker Kevin Kratt of Kratt Commercial Properties believes that well-positioned, well-maintained centers will continue to be successful.

“We spent a few hundred thousand dollars 10 months ago when the market really started to turn in the Academy Shops, at no cost to our tenants,” he said. “We added two towers — at Panera Bread and Vectra Bank — to increase visibility. We painted the exterior and added a higher façade for stores like the Mattress King, David’s Bridal and Extreme Pizza — and made sure parking lots were striped and the landscaping was enhanced.”

Those changes helped, he said.

“Our job as the owner is to provide the best possible environment for success,” Kratt said. “For me, the priority is to keep our shopping centers looking the best that they can look.”

One of Kratt’s biggest retail ventures — University Village Colorado on North Nevada Avenue — is proceeding as planned with 330,000 square feet of a total 650,000 square feet filled so far.

“You get what you pay for,” he said, “and even in this economy, by upgrading our architectural design in response to requests from UCCS and the Urban Renewal Authority, we’ll get our pick of good tenants.”