Eric Steckling, Pitney Bowes Business Insight
An earthquake can devastate a shoreline thousands of miles away in the form of a tsunami. In the same manner, short-term loans made to commercial-property owners 3 to 5 years ago could soon change the retail landscape for the years to come.
In 2010, $1 trillion in short-term commercial loans will mature. Typically, in the past, property owners were able to trade these loans for new ones and continue with business as usual. Now’s different. Many investors in commercial mortgage-backed securities have eaten substantial losses in the past few years and lack the appetite to throw good money after bad. Combine that with a rise in vacancies and a decline in commercial-property values, and you have the tremors that suggest a wave is coming. Retail properties that are in the black with strong occupancy and credit tenants have had trouble securing financing over the past several months. Properties that are losing money will most likely face foreclosure unless the owners reach deep into their pockets to provide sizeable down payments or to pay off the debt completely.
So the question remains: How can retailers leverage the faltering commercial real-estate market to maximize sales and market position for the future?
When is the lease up? Whether you operate a single store or a nation-wide chain, it is important to know where you stand on all your leases and when they are due for renegotiation. Consider the strength of your current property owners and remember that bigger does not necessarily mean stronger. When a center is losing money, the owner is less likely to perform standard maintenance, repairs, and updates to the property, which reflects poorly on the tenants in the eyes of the customers. If the ship is sinking, bail: as cotenants move out and the property languishes, sales of the tenants who stay in the center will likely go down with the ship.
Avoid the Fringe. You may want put that fringe site you were thinking about on the back burner. Chances are that the planned residential construction at the next highway exit out of town won’t be happening any time soon. Unless the site represents a legitimate market void, your dollars will work better for you closer to the town’s core population.
Why Build? Many commercial properties are selling for much less than the cost of construction. Acquiring and improving existing space can provide better return than would scraping new dirt.
Not every market is the same, but nearly every market will see some level of commercial foreclosure. Even strong markets that remained relatively unaffected by residential deflation and foreclosure will default some properties to the lenders. The dearth of financing options for commercial owners means that seemingly strong properties in strong markets will fail to cover debt obligations.
Two for the price of one and a half. Underperforming units with only a few years left on their lease may be good candidates for relocation. A new space may have better strategic and market position, as well as a better deal on the lease. It may make more sense to pay two leases for a short term, moving inventory and equipment to a new space that will provide higher sales volumes. Correctly forecasting the relocated unit’s sales is a critical basis for ROI decisions, so don’t skimp on the number crunching.
Cash is king. Simply put, larger retailers that can close deals with cash will hold a distinct advantage over those who normally rely on financing. Tightened credit markets mean that expansion plans may have to be curtailed for cash-squeezed retailers, even when sales at existing stores remain strong. Discounters Dollar General may have had trouble with their 500-unit-per-year expansion plans, had they not raised cash through a public offering (again) last November. It is probably too late to try to stash cash like an October squirrel stashes nuts, so if you have big plans, you may have to give up equity to generate working capital.
The current retail recession, by most accounts, is not expected to rebound quickly. The coming wave of commercial foreclosures will present a new set of challenges and opportunities for retailers who are involved in this process. Retailers with long-term leases in standalone prototypes will be less affected by the wave, while smaller chains and independents with more scalable store designs, will have the most to gain or lose. Whatever your position, it is time to consider how commercial foreclosures will affect your strategy. As any surfer knows, in order to ride the wave, you must paddle in the right direction.