We are in a kind of real estate battle of the bulge. We have too much space (the bulge) and not enough users to quickly alleviate the bloat of vacancies. It is true, we have seen some spurts and sputters, which have caused some to optimistically think and even say, “The recession is over, we’re coming out of it.”

Everything I read, hear, view and all of my experiences at the street level are telling me the battle of the bulge is not over and the trick of trade for survivors is the ability to buy cash flow and to buy it now. Yes, you heard it correctly. Owners need to change their posture and assume a position of cash flow deal makers.

Before you write me off, think about it carefully. Owners have always been engaged in buying cash flow. CRE 101 is cash flow as the basis for property value. Owners have always traded space and rate for cash flow. Our problem is that we are in various stages of denial about the current cost we must pay to purchase cash flow.

As unemployment increases, consumer spending diminishes and for small and medium size investors such a climate can produce a lot of sleepless nights. As the current credit crunch begins to squeeze owner refinancing options and new lending diminishes to close to a 50 year low, we are once again going to have to buy the limited cash flow at discounted pricing in order to sustain our properties.

Let me give you an example of the battle of the bulge and the principle of buying cash flow. Let’s suppose a particular geographic market area has 1,000,000 square feet of total retail space with a current vacancy rate of 27%. Let’s introduce a tenant default rate of 12% per annum into the equation (not far off the current mark).

Finally, let’s assume a net absorption rate of 5% per annum, meaning we have 50,000 s.f. per year being leased. This equates to a sustained vacancy rate of 220,000 s.f. vacancy growing at 7% per year.

Furthermore, it means that we have less cash flow to buy, therefore the cost of the cash flow increases over time, i.e., owners pay more for each tenant’s cash flow in order to remain competitive. Bottom line, NOI drops and NOI is our commodity.

In a five-year market of the kind we are experiencing the numbers look like this:

• Year 1 end = 220,000 s.f. vacancy
• Year 2 end = 235,400 s.f. vacancy
• Year 3 end = 251,878 s.f. vacancy (we are now at 25% vacancy)
• Year 4 end = 269,509 s.f. vacancy
• Year 5 end = 288,375 s.f. vacancy

During this transition, which is exactly the type of transition we are currently experiencing, the cost for limited cash flow is increased due to the economic principle of supply and demand. We are leasing but not fast enough.

Owners ALWAYS buy cash flow, make no mistake about it. My point is that it is going to cost us more to buy the decreasing cash flow available from the decreasing tenant pool.

Fourteen dollar retail leases are becoming $10 or $11 dollar leases. We are paying $3 to $4 more per square foot to purchase the shrinking number of tenants. Tenants know this and they are not selling their cash flow easily. Like the game of golf, the lowest scores are winning.

The ugly side of this is the certainty of diminishing property values. It is a reality we are going to have to learn to live with for another 24-36 months. Those who wait too long to adjust their pricing and leasing models will certainly loose the battle for the limited tenant pool.

The relevance of the piece was the central focus of creating consumer recognition and value…what else is new in the shopping center marketing game?

What captured my attention in the article was the renewed interest in utilizing events and promotions as a traffic magnet for center impressions in the minds of consumers, tenant recognition and of course, foot-traffic.

The perception of value in the minds of consumers goes beyond having access to a quality mix of retailers (my words) to what retail centers do to create value opportunities to consumers in the form of staged events…an old marketing concept now being resurrected.

Job fairs (relevant in these times), car shows, well-staged concerts (blues and jazz) and segmented events stretched over time that target shopper by product interest for moms, dads, singles, teens, seniors and other demographic groups are seeing a resurgence.

Farmers’ markets were the No. 1 event type that consumers both attended in the past and would like to see more of.” – ICSC shopper habit study

In my own marketing, I implemented retail center websites as a cost effective value proposition developers, owners and center marketing managers can use to provide existing tenants with additional exposure and promote retail center leasing opportunities.

By combining online exposure through Center Website/Blogs and annually staged events, centers can realize additional consumer traffic, predisposition, improvements in tenant satisfaction and new interest from new tenant prospects. There are few losers in this formula and such approaches can create the value proposition consumers seek.

At this time, magnetism seems to be the watch-word to traffic, value, revenue and satisfaction

Tenants come in two forms, good tenants and not-so-good (okay, go ahead and say it, “bad”) tenants. There seems to be no middle ground.

Tenants are capable of odd if not bizarre behavior and often they succumb to the same economic pressures impacting owners and landlords. Pressure can create abnormal responses in any person but when those pressures find their fundamental genesis in the economy, expect surprising tenant behavior.

Stories I have heard or read about lately make some tenants sound like Freddie Krueger…a bad Nightmare on Elm Street.

How to Handle the Next Nightmare. Whether on Elm Street or a strip mall in Atlanta, if you are a commercial owner, landlord, broker or property manager, you are going to eventually meet Freddie and have a nightmare tenant on your hands.

Dealing with Mr. Krueger begins with tenant screening and qualifying. If there was ever a precept that was violated by many owners during the market run-up from 2000-2006, it was qualifying tenants.

However, even after qualifying tenants economic and other factors can erode the performance of any tenant, creating desperation and a propensity to go sideways.

Owners can reduce but not totally control the “Freddie effect” by bearing down on the up-front analysis of the tenant. Controlling a future nightmare on your street begins with qualifying the tenant but it does not end there…read on.

A Second Line of Defense against Freddie the Tenant. Exceptional lease documents, drafted and designed to anticipate nightmares are the second line of defense against the Kruegers of this world. “I’m sorry,” I recently told a prospective tenant who complained about the length of the lease, “…the 28 pages of your lease are designed to anticipate just about anything and to protect you and the owner from misunderstandings.”

Bad documents seem to become “badder” (is that a word?) in the hands of a Freddie gone wild. Simplicity in the lease document can be a formula for future complexity and trouble on Elm Street.

As an investor, you don’t want to ever meet Freddie, the tenant, armed with a deficient lease document, cluttered with ambiguity. Freddie loves ambiguity!

Another thing I have learned along the highway of success and failure is that taking a strong position backed by logic, not rhetoric, is something Freddie understands.

When tenants have escalated the action, so to speak, the best position is a position of strength based upon facts, not emotional responses. Freddie loves fear…he thrives on it.

When a recently signed tenant angrily complained to me about not being able to occupy on the commencement date my response was to take a position of strength behind a quality document. My response, in part, was “…that is addressed in clear language in the lease and there is nothing I can do about that issue…” This defused a potentially volatile situation and kept the tenant from going “Krueger” on me.

Well drafted lease documents keep Freddie in place. After all, it’s much better to have a Mary Poppins than a Freddie Krueger on your hands.

When Freddie Keeps Coming Back. Like the horror flicks, Freddie never really dies and neither to tenant problems. If you have great tenants, stick around, Freddie is hiding in there somewhere, waiting for a chance to make a comeback.

To manage the potential return of Mr. Krueger, I recommend owners always use experienced property management as the front-line defense against negative tenant eruptions.

Property management is the third piece of the investment puzzle and can serve to help an owner keep his/her distance from day-to-day issues that should be handled by a Manager who knows the tenant, maintains the property and is not subject to the same emotional responses an owner may experience when faced with Freddie.

A good property management company will have its finger on the pulse of the property at all times and keep the owner informed but at a safe distance, thus increasing long term value through focused attention on the asset. Your property manager can warn you that Freddie is loose and enable you to solve issues before the slashing begins.

If you have never had a Freddie on your hands, count your blessings and be thankful this Thanksgiving Day. If you want to diminish the odds of an encounter with Mr. Krueger, use the three best tools available to you; (1) thorough screening of tenant, (2) a great lease document and (3) a property management company.