COVER STORY, AUGUST 2004

MANAGING TO WIN
Range and readiness go a long way in retail property management.
Tom Hoban

Jim walked into the property management office with a sense of purpose like I’d never seen before. He was always good about paying his rent on time, even during the off-season months when sales were predictably slow for his Pacific Northwest waterfront fish-and-chips restaurant. All of 900 square feet, the corner space he occupied in a multi-tenant waterfront complex could best be described as an awkward layout.

The Everett Marina Village, a waterfront shopping center in Everett, Washington, recently attracted a sleep disorder clinic to a former hotel space.

A self-described hillbilly from East Tennessee, Jim bought the restaurant some years after retiring from the Navy. Except for adding a southern delicacy or two to the menu, he had carried the fish-and-chips theme for more than a decade of ownership. Jim operated his restaurant on a percentage rent retail lease. As is customary with such a lease, there is a sales level per quarter over which he would have to pay an additional rent amount. He’d never come close to that sales level though, suffering through off-season challenges and the health food craze that seemed to work against his southern deep-fry approach to cuisine.

Jim never smiled when he paid rent. No one ever smiles when handing a property manager the rent check. Today was different though. Jim ran the numbers and determined that he had just cracked the sales break point where, in addition to his base rent, he was to pay an additional $67 for the quarter. It was clear that this was a big moment for him. He smiled. In Jim’s mind, paying the percentage rent was a goal line over which he would one day cross and today he was scoring a touchdown of sorts. He paid me more rent, but he was validating his success while doing it.

The retail property management business is full of such stories. From the mom-and-pop fish-and-chips restaurant to Fortune 500 anchor tenants, retail property management is a dynamic, unique profession. It requires that property managers understand the nuances of a family business and the sophisticated nature of national franchises. You have to know the difference between gray water and black water, parking ratios for medical versus retail uses, and signage requirements for greeting card shops and men’s clothing stores.

At the end of the day, a retail store’s success is determined by the security of its income stream, whether the rent check originates with a parent company in Los Angeles or begins and ends with the cash register on site. Effective retail property management correlates with those representatives who truly understand retail business. What are the sales per square foot that a particular tenant must achieve to be able to comfortably pay the rent? What percentage of its total gross revenue should a healthy retail business pay? Are there other businesses within the same center with competing business lines? Are there some with exclusive rights over certain products that will limit product sales for others? Often, the property manager is the only one in a position to know these answers — or at least ask the questions.

It serves the property manager’s interest, therefore, to lease space to healthy businesses with bright prospects for the future. Dealing with delinquent rent payments is unpleasant enough. Watching a tenant’s business go under because he failed to build a solid business plan is worse.

The retail business is a fickle one. Just when the retailer and, by extension, the property manager think they have their market cornered, it changes. Restaurateurs know this very well. They are changing and adapting their menus all the time. What worked today may not work tomorrow. For example, technology virtually killed the cigar shop market. If a property manager was writing a 5-year lease renewal on a retail cigar shop in the late 1990s, he or she might not have been able to predict that Internet sales of cigars were going to mean the demise of that tenant before the renewal term ran out. This sort of rapid change to the consumer market underlines the fact that the property manager must be in tune with industry trends that affect the tenants’ businesses.

Developers try to respond to the transient nature of the retail world with changes that start from the presentation of the product right through to the store shelves. After all, retail customers really don’t care who owns the mall, the parking lot or the business. They just want to buy shoes. The onus is on the symbiotic relationship between the developer/landlord, tenant and the consumer. Using their rent dollars, retailers will tell property managers what is working and what isn’t — it’s not all a guessing game.

A strong trend today, for example, is the shift in shopping center development from the large enclosed malls to the outdoor, pedestrian-friendly destinations. Opening up retail properties in such a way creates more of a sense of place, a much different experience from the traditional indoor malls that have prevailed for the past 30 years. Developers are essentially responding to their tenants and what they think will ring their cash registers.

Screening tenants, structuring sound leases, working with tenant mixes, balancing parking requirements and securing adequate signage are all requirements for the successful retail property manager. Staying constant with these core competencies while constantly adapting to industry trends makes the difference for successful retail property management.

The reality, of course, is that we can’t always attract perfect tenants to our retail centers. Property managers have a budget to abide by and an occupancy level to achieve. So when tenants fail to fit the ideal category, we need to be absolutely sure that nothing in our control contributes to the business risk inherent in the trade. While possibly having its fate sealed, the cigar shop still might have worked for the property for part of the lease renewal term. Anticipating industry movement is one thing, compromising on retail property management imperatives is another. For example, making bad decisions with parking requirements can create problems for even the strongest retailers. Nothing handicaps a business like the inability of customers to access it. Property managers must be sensitive to compatible parking arrangements no matter what the trends are.

Creating a quality tenant mix is another essential that cannot be compromised. Placing an auto repair shop next to a day care center is a bad idea. Mixing drive-by retail with destination retail can be a challenge if not planned well.

Perhaps more than any other type, retail property managers must know their tenants and understand their businesses in a unique way. More and more, property managers are being viewed as investment advisors and business planner/consultants as much as day-to-day operators. That places higher expectations on them than ever before. The property manager has to be a little bit of country for the hillbilly owner of a fish-and-chip restaurant and a little bit of Wall Street for the national retail anchor.

Tom Hoban is CEO and director of business development for Coast Real Estate Services in Everett, Washington.

©2004 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.