Archive for September 2011
Shopping at Sydney CBD
The city of Sydney in Australia offers a shopping experience that can be relatively delightful. Huge department stores and shopping centers in Sydney are closely built within only a few blocks from one another. Sydney shopping stores are by and large open between 9 in the morning until 5 in the afternoon on weekdays. Some of the well-known shopping centers in Sydney CBD are:
The Queen Victoria Building Shopping Center was opened in 1898 as purpose built shopping center in celebration of Queen Victoria’s Golden Jubilee. There were some years that this building was neglected and ignored and eventually came to a shabby status. But during the 1980s, major restoration were done to this old building that restored its magnificence. These days, QVB is regarded as a striking illustration of Victorian architecture in the city. Inside the building are 190 collection of designer labels, specialty stores and diners. This immense mall is located along George Street just between Town Hall and Market Street.
The Strand Arcade is a trendier and more modern version of the Queen Victoria Building. It opened in 1892 but was almost brought down by a 1976 fire. The Shopkeepers in the mall brought it to restoration and is nowadays a perfect mall to find the top designer labels in Australia together with some jewelers, boutiques and beauty salons. The Strand can be found in the heart of Pitt Street.
The Skygarden is a shopping center with a stunning and classy ambiance that opens 7 days a week. Inside the mall there can be found a superb collection of international and Australian fashion labels. This mall is located between Pitt Street Mall and Castlereagh Street at the heart of Sydney’s central business district.
The Piccadilly is a shopping center where some of the high end fashion retailers in Sydney can be found. More than 40 specialty stores and boutiques selling various items from footwear to home wares are housed in the mall thereby making it an ideal shopping place to find the best gift for any occasion. This mall is located in Pitt Street opposite the Hilton Hotel.
The Grace Brothers department store is composed of seven levels or floors. Its mezzanine floors make the place seem like an exhibition space instead of a shopping store. This mall has the largest collection of cosmetic range all over Australia in addition to showcasing the most recent models of appliances and computer equipments. This mall, which is a landmark in itself, is located in the Market and George Street corner.
The David Jones holds the title for being the oldest department store in Sydney. It is also among the department stores in the world which still operates using its original name. This mall is also the first mall in the city of Sydney to have a hydraulic lift and presently sells furniture and furnishings. As it still operates in its original trade name, so does it operates on a primary motto or commitment which entails offering the best and most exclusive of all goods. This mall can be found in Market Street and Castlereagh Street.
Shopping Center Management – How to Keep Tenants Longer, More Profitably
Never has there been a more important time to retain your shopping center tenants than right now. Losing a major tenant is damaging in the best of times; losing a major tenant in a recession could be disastrous.
From our years of experience in managing shopping centers of all sizes all over the nation, we’ve come up with some general guidelines for tenant retention that you may find useful as you manage your properties.
Guideline #1: Vet Your Prospective Tenants More Carefully Than EverWith qualified tenants getting more and more rare these days, you may be tempted to relax your vetting procedures a bit just to fill the available space. Our advice: DON’T DO THAT! The old adage still holds that if a prospect looks shaky early on he’ll look even worse under contract . The only difference perhaps is most owners can less afford a bad tenant today than previously. There are more barriers to success in this present economy, so don’t take on unnecessary risk just to fill a lease.
Instead, look into your prospect’s references and financial statement more closely than ever before. Down the road, you’ll be glad you did. There are proven vetting procedures (which we implement on behalf of all of our clients) that will give you a realistic, no-holds-barred assessment of the prospect, greatly enhancing the likelihood that he will either be turned down…or be with you for many years into the future and keep your turn-over to a minimum.
Guideline #2: Understand What Tenants Are Thinking
When vacancies start piling up, it’s quite likely someone hasn’t been in the facility communicating with the tenants. A vacancy should never be a surprise, and in many cases, it can even be avoided.
In shopping center after center, we verified again and again that there’s just no substitute for getting out and interfacing directly with your tenants. You (or better yet, your qualified property managers) have to get out and invest significant face time with tenants, talking, listening, probing, analyzing. That’s the only way to understand where tenants stand in terms of their happiness, their stability, and the future of their relationship with you.
Ask carefully crafted questions to get to the core of existing problems. Determine what they like or dislike about the facility, the management, and the owners. Find out if there are maintenance issues, concerns about traffic, problems with neighboring tenants, parking or street traffic issues, or just about anything your tenants may be worrying about.
Guideline #3: Be a Pro-Active Landlord
Don’t sit around assuming everything is going well with your tenants. Insist that your property managers are out on contact tours regularly. In a typical neighborhood shopping center, the tenants are more often than not mom and pop businesses. And again typically, their leases extend from 3 to 5 years. That’s a relatively long time, and financial situations can change, even for your most stable tenants.
Make it the job of your property manager to find out what these changes might be, and whether they will impact either retention or lease abandonment rates. Remember that when your spaces stand empty, your ability to meet your own financial commitments go down. We train our property managers to stay on top of tenant financial stability so you won’t get caught empty-handed down the road. That calls for a completely pro-active management attitude. Your manager has to be involved, constantly available, and 100% on top of what’s happening at all times.
Guideline #4: Analyze everything.
It’s not enough that a good property manager gets out there and interfaces with tenants and vendors on a regular basis. He has to be a skilled and conscientious analyst, as well.
A good place for the analyses to begin is with the basics:
o Current rent roll
o Tenant roster
o Lease expiration date
o Tenants’ renewal options
o Next rent escalation
o Amount of current rent.
Next, analyze the stability of your shopping center as it relates to:
o Breaking up the space to gather more rent
o Condition of the property
o Evolving conditions/business climate of the areas surrounding the center
o Ability to redevelop and the feasibility of that option
o Facelift vs. Complete Redevelopment
o Ability to bring in new (and national) tenants
o Keeping the center current and up to market standards
o Lease renewal options to help owners protect their assets
With all of this data in hand, you can now realistically face your property’s true prospects for the future, keeping in mind the unforeseen events that can’t be analyzed from data. Bottom line: the more you know about your property, tenants, property managers and local economic conditions, the better prepared you will be to handle whatever comes down the road.
Strategy For Shopping Center Investments in California
Investing in shopping centers in California presents a real challenge for many investors. Most shopping centers in the state offer very low if not the lowest cap rate in the nation, e.g. 4-6% range. As a result, the cash flow is weak compare to shopping centers in other states. Investors will also need more money for a down payment, e.g. 40-70% of the purchase price to qualify for a loan.
The upside is that the vacancy rate for retail properties in the state is among the lowest in all 50 states. For example, the retail vacancy rate in San Jose is only about 4%, the second lowest in all major metro areas (Oakland has the lowest vacancy). This means the income stream should be very stable. So, as an investor, if you don’t achieve strong cash flow, you must look for property with strong potential for appreciation to achieve better investment returns. To accomplish this, you could:
1. Sell the property at a lower cap rate. If you purchased a shopping center at a higher cap rate 5-10 years ago then you will be able to capture strong appreciation. However, if you purchased the property recently at a low cap rate already, it’s not possible to reduce the cap rate much lower. So this approach probably won’t work.
2. Increase the rental income. Most NNN leases have a fixed 3% annual rent increase. Assuming the market cap rate remains the same, this will only equate into an unimpressive 3% annual appreciation, unless you want to achieve appreciation in different ways.
Property Analysis
The goal to increase the rental income begins with the analysis of your purchase. While most retail properties in California offer 4-6% cap rate, many properties charge tenants below market rent due to
1. Poor property management and/or simply ignorance about market rent. Some property owners choose to manage their own properties to save expenses. However, they are among the worst property manager if the collected rent is used to measure their performance. They often are not aware of the market rent and so they often lease to the first tenant to ensure the unit is occupied quickly.
2. Long term leases signed when the rent was low.
So the key is to identify properties with below market rents and a low price per square foot. These properties will provide you with upside potentials. However, the market rents often have a wide range. For example retail space in San Jose commands between $2-5/SF a month. It’s not easy to determine if the tenants of the property pay below market rent. The following are some properties that have low upside potential that we may want to screen out:
1. Big-box properties with anchor tenants, e.g. Wal-Mart, Target, or Safeway. These big national tenants often sign long term lease with low rent due to its creditworthiness and large rental space. Once the lease is signed, the rent is locked in for 20-30 years. So it’s almost impossible to drastically increase the income within a short time. As a matter of fact, many big-box retail properties in California are listed at below replacement cost. This is because they have long term leases with below market rent. They are on the market for a long time and yet is not sold because the cap is low, e.g. 4%. The prospect for higher income is sometimes 15-20 years away when the lease expires.
2. Retail centers with very high price per square foot, e.g. more than $800/SF. You will need to charge the tenant $4/SF a month plus NNN to achieve 6% cap. This is almost the highest rent in the market so it’s hard to push it up even higher.
3. Retail centers with long term options AND fixed 3-5% rent increase instead of being adjusted to market rent. You should pay attention to this little detail in the lease as it may have major impact on the rent you collected. The problem is the appreciation is often higher than 3-5% annually in California. So if rent is not adjusted to the new fair market rent at the beginning of a new lease option, the rent is most likely below market rent and it may not sell at the highest market price.
On the other hand, if you see multi-tenant shopping centers offered at 4-5% cap but priced at only $200-300/SF it’s very likely the property has below market rent. This kind of property will offer strong potential for appreciation. Once you see this property, you should also see if the property is:
1. Adjacent to an anchored tenant. Business owners prefer to be near an anchored tenant as this anchored tenant will bring in more traffic to the center. The business owners are willing to pay higher rent for this location.
2. A multi-tenant strip with small units. In general the rent is higher for small units, e.g. 1000 SF than for larger 4-5000SF because there are more tenants looking for 1000 SF units.
3. On a major artery or near the freeway. More traffic and convenience are always good for business.
4. In a stable or growing area with higher household income. When the local residents have higher disposable income, they will spend more time and money for good and services offered in the retail centers.
5. Located in an area with low vacancy rate and high rents. Ideally, you want a property lease that will expire within 1-5 years. This will allow you to adjust to the higher market rent quickly.
Sometimes it helps to see problems as opportunities. For example:
1. Most investors don’t like retail strip with gross leases. However, if you can convert these gross leases into NNN you will be able to get strong appreciation.
2. Most investors don’t like a shopping center with high vacancy. However, you may be able to buy at a low price. If you can turn around and improve the occupancy rate quickly, you will be able to realize good appreciation.
Property Management:
Once you purchase a property, you will need a good property manager to help increase the rent. The property manager is a key partner to implement your investment strategy. In order to increase the rent substantially, e.g. 30-50% more compared to the rent in the previous lease, the property manager must demonstrate to the tenants that the new market rent is a fair market rent. Otherwise, the tenants may make a wrong decision and move out. This involves research to determine fair market rent and providing comparables to the tenants. So as a fair business person, you want to make sure the property manager has an incentive to do the extra work. One way to accomplish this is to compensate the property manager a certain percentage of the appreciation when the property is sold in addition to the typical 4-5% property management fees. This is a win-win for both the property manager and landlord when the property appreciates in value due to higher net operating income. Otherwise with a typical 4% fee in a property management contract, you will likely receive a 3-5% rent increase when the lease is renewed. Both you and the property manager lose when this happens.
Of course, some tenants with marginal profits won’t be able to afford the higher rent and will move out. The property manager will have to evaluate the financial and business strengths of all the tenants and identify potential move-out’s. She will plan accordingly to find replacement tenants to minimize income disruption.
Prior to a substantial rent increase, you may want to make cosmetic changes to the center to give it a new look. You may want to consider the following:
1. Re-paint the center.
2. Re-surface and paint the parking lot.
3. Ensure the air conditioners and heaters are in working condition.
4. Fix any leaks in the roof.
When the tenants see these improvements, they may convince themselves that it’s too risky to move the business to another lower rent location.
Favorable Financing:
You can also improve cash flow by obtaining financing with favorable terms from unconventional sources, e.g. insurance companies or conduit lenders instead of typical commercial lenders. While you have to pay higher loan fees and closing costs, the long term savings in interest payment are substantial. This should lower your interest rate from about 6.75% to 5.8% for multi-tenant shopping centers.
Conclusion:
The commercial real estate market in California is very different due to its very low cap rate. To achieve strong investment return, you will need to be a creative business person with this “so-called” passive investment. By choosing the right property with below market rent, hiring a highly-motivated property manager, and selecting low-interest financing, you will achieve strong cash flow and robust appreciation within a relative short time.
Disclaimer: The investment strategy and investment management information presented in this article should not be construed to be formal financial planning advice or the formation of a financial manager/client relationship. The authors intend to provide information to the general public based on our recommendations of investment management and investment strategies and is not designed to be representative of your own financial needs. Nor does the information contained herein constitute financial management advice. The authors makes no warranty or representation regarding the accuracy or legality of any information contained in this article, and assume no liability for the use of said information. Please do not make any decisions about any investment management or investment strategy matter without consulting with a qualified professional.