The following video was shot on a recent drive to Phoenix and is the first of what I hope will be a regular feature entitled CRE Road Kill. In this installment, I am addressing what I call the Tenant Trough, what it is the problems it creates for owners. In Part 2 I will talk about solutions…stay tuned.

Merriam-Webster defines “trough” as follows:

• a long and narrow or shallow channel or depression (as between waves);
• the minimum point of a complete cycle of a periodic function;
• the low point in a business cycle

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

Yet, in this case the endorsement is a necessary and complimentary one that serves the interests of commercial real estate investors in the greater Prescott, Arizona market area.

Although oxymoronic, please meet my “cooperating competitors.”

The Prescott Area Commercial Group (PACG) is a non-profit real estate (is “non-profit real estate” an oxymoron) consortium that promotes investment, training and networking of property information among central and northern Arizona commercial brokers and agents.

The Power of Disciplined Focus

PACG represents a disciplined focus on commercial real estate investment and property performance among perhaps the most experienced and highly trained professionals who know and understand the fundamentals of investing in real estate.

PACG was originally formed as a commercial networking group that met to discuss Prescott, Arizona’s commercial real estate market, properties and opportunities. Now PACG is more than a quiet group meeting over coffee to exchange listing and sales information.

The commercial real estate market demands a disciplined focus in order to stay on top of the rapidly evolving trends.

Risky Business or Cooperative Competitors?

PACG is now the most prominent and perhaps “connected” group of commercial specialists in the northern Arizona real estate market.

Having met with most of the PACG Members and interacted with them, I can state without reservation that they are a qualified and trustworthy group that any owner or tenant can call on for assistance. PACG members know their stuff and they work hard to consistently improve their skills and knowledge in order to meet the needs of each client.

Introducing competitors may be regarded as a bit risky, however, in today’s volatile market I believe having a network of trusted colleagues who can provide a kind of “brain trust” is an asset that can be called upon and tapped into for solutions.

Sounding Rusty and Eroded

At the risk of sounding old or, at least rusty, dated and eroded, I’m going to reach back in time and drag an old principle forward. In decades long gone the industry where I have made my mark and enjoyed my gains (and honestly, some losses too) was one built upon trusted associations where business resulted largely from shared information gained from a trusted network of professionals.

Yes, some of this has been eroded over time, which is why I find my association with PACG PACG members refreshing, non-threatening and beneficial to both me and my clients.

I don’t mind if you meet my trusted competitors.

Posted by Donald Teel, Arizona Commercial.

Jones Lang LaSalle Americas CEO Peter Roberts, CEO of Jones Lang LaSalle Americas, discusses the commercial real estate rebound and what investors are doing to prepare for it with FOX Business.

President Barack Obama

The Obama Administration has been funneling billions of dollars into lending institutions and dedicating billions more to the housing industry and its hoped-for recovery. This begs the question, is the President ignoring the problems now surfacing in the commercial property sector of the economy?

The short answer is yes. The longer and more complicated explanation may lie in understanding the fundamentals of the lending and insurance industries as they are the prime note holders and owners of much of the nation’s commercial real estate.

Although commercial property value declines are now underway in almost every property category, lending institutions may be free to use TARP and other funds to shore up the ailing commercial market.

A high percentage of commercial real estate owners (estimates are between 40% and 80%) will find refinancing difficult from 2009 through 2012 as 3 and 5 year note calls begin to kick-in and owners face a new set of qualifying requirements designed to reduce lender risks in commercial property lending.

There appears to be more creative liquidation and seller financing emerging in the market as owners face the reality of a shrinking market and the pressure to create cash flow.

Creative financing has been and will continue to be a major factor in structuring transactions during the commercial real estate recovery. We have been recommending that owners who can take on the roll of lender do so as this leverage enables competitive pricing and can produce healthy yields over the long haul.

It will be some time before we have any definitive indicators that the President’s overall approach to the economy has helped or harmed the commercial real estate sector.

This post written by and sponsored by Donald Teel, a Commercial Real Estate Specialist in Prescott, Arizona affiliated with Arizona Commercial. Donald can be reached by calling him toll free at 1-877-777-9100.

Posted by Donald Teel, Arizona Commercial

CommercialWebPage.com has been saying that the commercial lending industry was likely to become problematic for current owners and new investors. This creates cause for careful analysis and a strong look at what and where the marketing opportunities will be.

Some small investors need to take a hard look at their refinancing blueprint, especially those with notes coming due in the next 12-36 months. For those owners who are fortunate to be F&C on their properties I advise they give careful consideration to selling with carryback financing.

Listen to this report from Tom Fink, Senior V.P., TREPP, LLC and former CFO for North American Development Bank and then draw your own conclusions.

For more assistance or consulting services with respect to your commercial investment strategies email Donald Teel or, if you prefer, call me toll free at 877-777-9100.

Jim Pullaro - Broker

Posted by Jim Pullaro – Designated Broker

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