In the retail world of Commercial Real Estate, what was big and fat is now being honed down in size, shape, color and message.

For most of my career retail centers, gerenally speaking, all looked the same. All shopping malls have been essentially the same and all open air centers were all the same. Town centers…same! Strip centers…yep, same! With few exceptions, there existed little or differentiation in the marketing or the appeal. With the exception of Outlets and higher end centers, retail has been essentiall the same, tame and lame story.

Design is free when you get to scale. The riskiest thing you can do now is be safe…safe is risky. — Seth Godin

One of the most important ingredients in retail today is the ability of a location to “stand out” as a unique place that delivers a constant stream of products that are remarkable and irresistible to “unique” people and groups. Emphasis on “REMARKABLE” and emphasis on “UNIQUE.”

Listen to Seth Godin from TED on the topic of standing out.

Has anything changed since Trump wrote his 1988 best seller? Yes, a lot has changed. The fundamentals of deal making have not changed and perhaps they never will.

Making deals is one thing…now, however, the renewed skill that is most in demand is how to shape the deals we are making.

Due to today’s unique economic times, I’m discovering there is a big difference between securing signatures and shaping a deal for long term performance.

In fact, shaping the deal may be the requisite skill now in most demand because there are fewer deals to be done and the deals that are getting done require more perseverance and targeted thinking.

Negotiating Breakfast with My Daughter

Almost every day, we are all negotiating something. I did it this morning with my 9-year-old daughter. We negotiated about her breakfast. She wanted chocolate donuts, not one, but two! Once we formulated the premise for the sign-off, i.e., what each side had to have, we then had the core of the deal.

My position was clear. “You cannot have donuts for breakfast.” Her position was, “Donuts is the only way to make this deal work.”

Of course, like all parents, we often have to force the deal on our children, especially when it comes to property diet.

My daughter knows the limits when pushing dad around. We have long ago established the negotiating framework. She opened the shaping phase of the negotiations with “So, Dad…you said no donuts for ‘breakfast’…that means I can have one if we don’t call it ‘breakfast’…we can call it desert from last night’s dinner.”

Suddenly, I was reminded of the power of shaping the deal, rather than simply making the deal.

The negotiations were shaped and the deal finalized after a healthy breakfast of fruit, scrambled egg and one strip of bacon. On her side, she got half a donut placed in her lunch box. She got some of what she wanted…I got some of what I wanted and what I know as a parent she needs.

Shaping Deals with Adults who Fight Back

There is a big difference between negotiating and shaping a deal with a kid over whom you have parental rights and authority and squaring off with adult negotiators who fight back and refuse to be shaped.

In the commercial real estate arena the principles of shaping the deal are the same. And here they are for you master negotiators:

• Understand the financial framework of the deal; your side and the other side. Clint Eastwood once said in a movie, “A man’s got to know his limitations.”
• Create points in time where you give the other side what they want. If you cannot surrender a point today, when might you and how might you at some point in the deal.
• Engage in trade-offs that are tangible and represent real concessions…people are not stupid, so be honest and don’t try to smoke and mirror the other side.
• Keep reminding yourself that you may never have another opportunity to shape the deal in front of you. In today’s complex market investors and tenants are fickle and may not return to the table.

Of course, some deals cannot be shaped. When the numbers do not work, they simply do not work, period. You cannot shape a $30 per square foot deal in a $20 market, usually.

What you can do is shape the transaction, its terms and cash flow in a number of ways to create transitional value in the down market so that in 3, 5 or 7 years your value position is closer to the desired financial end point.

Say “No” too early in the process is often going to kill the transaction for all parties. Replacing “No” with “Let’s look at this to see if we can make it work” is the first step in shaping the deal.

Shaping the deal will protract the cycle, increasing the cost of sale; time is money. There are few quick-close deals in my market. The limited deals take longer. The economy has created Principals that are decidedly more hesitant and methodical as they wind their way through the deal.

Shaping is becoming the new norm and the skill-set required is not easily found and maintained. We have been spoiled by the easy deals that were part of the 2000 to 2006 real estate boom. These are gone, perhaps for good. The bar has been raised and shaping the deal is often a more powerful skill than simply making the deal.

As capital drys up, the pace of investment slows and qualified tenant pools shrink. Engaging in the science and art of shaping the deal always made sense but now it is the critical element.

Shaping the deal is the new watershed.

Now, some nearly 25 years hence, I truly do recognize the importance of “sorting” and the notion of elimination has become more and more a part of representing my commercial real estate clients effectively.

Of late, and driven by market conditions, there has emerged a new brand of bottom-feeding. It’s a concept I call “LOI Shopping” or, maybe “Networking the Deal” for better terms.

There is no doubt in my mind that this carp-like behavior among prospective tenants is a product of too much inventory and the desire of often marginal tenants to continue their vain attempts to shrink or even collapse the pricing envelope.

Mind you, there is no orchestrated conspiracy here; just a glut of inventory and an every expanding population of weak tenants who think if they shake the tree hard enough fruit will fall to the ground.

Well, I am mad as hell and not going to take it anymore! I am implementing new measures to expose and terminate the pretenders…these fakes and would be tenant hypocrites who are representing themselves to my clients as so much more than they really are.

Although I am not ready to strap on a six shooter like Richard Boone did in “Have Gun Will Travel,” and ride into some western town on a mission of settling scores, I am ready for a serious revision of my qualifying language and the way I handle the “wanna be” candidate.

Sorting through Hypocrisy

Since we are using some Latin, let me throw in some Greek too. The work “hypocrite” is derived from the Greek noun “υποκριτής” meaning “one who wears two masks.” It’s the source of the theater icon that depicts “comedy and tragedy.”

I am ready to pull back a few masks and find out what is behind them. I’m ready for a lot less comedy, especially since no one is laughing. Then too, I am not especially fond of the tragedy angle either.

Masks don’t work well in the empirical world of commercial real estate. Masks are only suitable for the stage, where the emotions of an audience are supposed to be toyed with.

I’m going back to what Del Webb taught me as a highly skilled Sales Counselor…the principle of Terminatio Simulatio Velociter or, in plain English, TERMINATE THE PRETENDER QUICKLY.

You see, guys like Del Webb understood clearly the principled approach to professional representation. There are only two types of real estate investors or, in the case of Del E. Webb, home buyers; the ones that will and the ones that won’t…the ones that can and the ones that can’t…the ones that do and the ones that don’t.

Those that will are those than can and those that can are those that do. No mask, no pretense.

To the Webb organization, the deliberately implemented sorting process begins at the first business encounter (give name, get name, use name) and continues as an integral component of all the follows, culminating in securing loyalty, examination, agreement and execution.

For the foreseeable future, the market is going to continue to hammer us all, owners, tenants and brokers. Too many properties, too little time and too few truly qualified tenants and investors.

I’m going back to the principle of Terminatio Simulatio Velociter or, in plain English, TERMINATE THE PRETENDER QUICKLY.

It is not that I am reluctant to be completely transparent with a client. That is the easy part. The difficulty lies in communicating to commercial property investors that they may be facing a new commercial reality.

Our new commercial reality contains several characteristics that make buying and selling, leasing and landlording and other forms of investment more precarious than perhaps in times past.

Heads I Win Tails You Lose

Commercial real estate values are tipping and for some investors it doesn’t matter what side of the coin comes up.

In a majority of major commercial markets commercial property is softening and for those who purchased in 2005-2007, things may be less than stellar. This is also true of commercial real estate markets like Prescott, Arizona.

Owners who purchased in the 2005-07 framework invested at the top of the market…they bought high.

Commercial Investment Reluctance

Investor reluctance is a second factor impacting the answer to the “What do you think my commercial property is worth?” question.

We are in the shadow of hesitation. Lack of confidence is creating a wait and see menality for some investors. This simply means that commercial property owners will need to be more creative with respect to how they attract tenants and buyers.

Commercial Financing Rules

Lenders are implementing both new and more stringent commercial property financing rules. It is simply more difficult to find funding than it was in 2002-2006 and lenders are burning through spreadsheet analysis in an attempt to only fund the most promising and secure loans.

Yes, lenders are lending! But lenders are lending more cautiously and they are less willing to bet on traditional performance with respect to property appreciation. In fact, they are factoring in depreciation based upon performance actuaries present in the market.

All is not lost. We are simply in need of a dose of creativity with respect to investing and divesting of commercial property.

Need new strategies? Call me at 1-877-380-1000 or, if you prefer, you may email me.