Real Estate Markets & Demographics - Technology and the Internet Effect on Real Estate

On a macro level, RE execs are not calculating the affect of technology and the internet on the asset class. Included are a few examples i.e.;

1) Turmoil in the selling of books. When Amazon started selling books over the internet it was a switch from pricey retail real estate in urban/suburban areas to industrial warehouses in semi-rural areas. A net decline in SF I am sure also occurred. When they introduced the Kindle - their e-reader - no longer need as much warehouses to store the books or industrial space to print the books (printers, binders, etc;)

2) The media industry – Newspapers and magazines are being delivered on the web and on the Kindle – the needs of office space, printing plants, warehouse distribution are significantly reduced. Demand for retail space will also be reduced - i.e; the magazine stands.

3) The recording music industry –Like book publishing has made a similar transition - from expensive retail locations to websites to electronic delivery of the music i.e.; Apple Itunes,

4) The distribution of event admission tickets – Broadway shows, baseball tickets, concerts are all being delivered electronically.

5) Cloud computing and the creation of virtual data centers. From corporation's office space and back office space to massive data centers, some of it outsourced. Will also result in a negative decline in total RE utilized.

6) Record Storage - the paperless office - i.e; Many medical offices are scanning in their documents which takes up signficant amounts of space in their office. This is freeing up space for more examining rooms or they are reducing their needs.

For these companies and other industries it will be necessary for the real estate executives to parse the growth in these companies' real estate needs vs their business on the web-based or what they can deliver electronically.

Demographics - Unemployment & Income - the Real Estate Unknown !

National unemployment statistics of today approximates 9.8%. However it does not include the disenfranchised worker, the one who is no longer w0rking. In real estate it is typical to estimate that each user of an office building will take up 200 - 300 per sf. These absolute numbers total a very large amount of SF no longer being utilized.

Hidden from these statistics are also the new worker, those coming out of high school and college and are looking for work. These two groups are not counted in first time claims because typically they have never worked to begin with.

Also, for those on a commission or bonus basis, with the economy faltering these economic groups are making less, significantly less. While still employed they too have curtailed their spending.

Thus all of real estate is affected, some property types more directly than others. Pundits have called this phase of "the recovery" a jobless recovery... so far. However, no jobs, no sales and no one to take up 250 per SF.

America's GDP relies upon the consumer to spend in order to grow. Lower sales lower rents and increases vacancies at the retail property. Financial service sectors losses have left large amounts of office space available for rent. Fewer goods shipped less of a need for industrial space. etc;

Real demand for space in real estate is based upon the number of jobs in the market, not just the sales of a property. No jobs, No Sales and hopefully no building during this period.

Accounting - It's Budget Time Again !

As we enter the Fall Season, it is time to begin thinking about budgets. Given the current dismal economic scene, I am suggesting this year, that owner give as much time to tenant retention and improving operating efficiencies of the properties as they normally would give to new leasing, refinancing and major capital expenditures.

The reason is obvious –not many tenants are expanding or looking to upgrade their space. Capital is scarce and preserving cash flow is paramount. Keeping a tenant in place is often significantly cheaper than replacing the tenant. This will be a very difficult year to growth the top line, so property managers will need to reduce the operating expenses.

Tenant Retention - Talk to the Tenants !!!

From building operations to neighborhood trends to what your competitors are up to, the most useful information about your property often comes from your tenants.

¨ Scrutinize the tenant rent roll for leases expiring in the next 18 – 24 months. These are the tenants most at risk of leaving the building. Start talking to them now.

¨ Inspect the tenants’ spaces to see for yourself what is needed and what additional amenities may appeal to them. While visiting all spaces may not make sense, the expiring tenants and your largest tenants are most vital to your property’s success.

¨ Create a tenant survey to determine what is of importance to the tenants. Do not email the survey, but speak to them and use the time as an opportunity to market your property. Find out from an insider how to improve your property. It’s a good chance your competitors are already talking to them.

¨ Determine who is thinking about staying and who is considering leaving. Strategize about what concessions monetarily or otherwise you will need to make in order to keep them and whether it financially it makes sense to offer them. Is it just free rent or is it freshening up of the space.ust

Inspect the Property

In this current environment, property site and building inspections should be mandatory in order to analyze operating efficiencies and review the building’s appearance. Are the public spaces pleasing to the tenants and their visitors? Does it look like the property is being maintained? Are there any major capital expenditures that can be put off this year?

Analyze the Expenses

¨ Review staffing levels and hours of operations to determine if they are at appropriate levels and determine what you can get away with. Can two part-timers (with minimal benefits) be as efficient as and less expensive than one full timer? Is outsourcing the function more cost effective i.e. security, maintenance? Closing up entrances and reducing the lighting/HVAC at appropriate times are additional ways to save on expenses.

¨ Rebid out all contracts to determine the best cost provider. Determine if a multi-year contract will offer more protection/less expense than a one-year contract Expenses should be reviewed both from a dollar cost perspective and a physical unit expended; how many hours of cleaning, BTU’S of gas burned, light bulbs replaced. . If there is one expense that is unusually high, almost assuredly there is a consultant out there who can assist in your analysis. Many consultants will charge a fee based upon a percent of the savings reduction so there is no direct outlay of funds.

¨ Conduct an energy audit. In years past, single paned windows and incandescent bulbs were telltale signs of energy inefficient properties. Today all aspects of the building envelope are subject to issues of energy efficiency. Converse with local officials and utility companies to see what assistance and incentives they can provide for upgrading your property. Talk to multiple service providers as well i.e.; those that can upgrade your energy management systems. They are often quite informative as they try to sell you their systems and products. Investigate whether there any products that can be installed that will provide a quick payback; i.e.; less than 3 years. Can the building be Leeds certified?

¨ Also, perform a lease audit of key tenants to determine if the tenants are being correctly charged their base rent and expenses. In retail properties this is routinely performed along with a sales audit.

¨ Can expenses be reduced by scales of economy? Insurance is often cheaper if it is bid out as part of a portfolio as opposed to an individual property. Are there any items that can be purchased in bulk as well such as utilities or cleaning supplies?

Review the Performance of the Hired Guns

¨ Review the performance of your leasing team. Have they outperformed the market? Provide you with valuable feedback on the market place? What is an appropriate period of time to judge their performance?

¨ Review the Property management company's performance. Has the property met its budget goals? Is the building well maintained and safe? Are the property managers pro-active with the tenants and do they maintain a good relationship with them? Are they providing quality financial and managerial reports? Do they actively manage the accounts receivable and keep the vendors at bay?

¨ Assess the performance of the Real Estate Tax Consultants. Have they been successful in their tax appeals?

· Review Legal Fees and Accounting Fees – What can be done in-house by the property management team versus hiring the professional?

Stress Test Loan Cash Flow Assumptions

¨ Once the 12 month pro-forma cash flow has been built, stress test the cash flows. Will there be enough money/cash to pay the debt service if the largest tenant leaves or occupancy drops by 10%? What happens if there is no lease up this year or market rent continues to decline? If these tests provide you with negative answers then it is time to start thinking about talking to your lender.

Create a Strategic Plan

Lastly create a strategic plan based upon ownership goals that:

¨ Identifying areas to improve
¨ Implement cost saving measures
¨ Seeks additional sources of revenue
¨ Creating an action plan to maximize NOI and cashflow
¨ Assess the risks embedded in the underlying asset
¨ Forecast cash flows


Real Estate Asset Management Partners

With over 25 years of experience in real estate, we are here to assist you. If you need assistance in creating a strategic plan for your property or reviewing the budgets, please do not hesitate to contact us.

__________________________________________________________________
Real Estate Asset Management Partners 1-201-401-7801

Retail - Marketing - Combating Declining Sales Without Expending More Dollars or Effective Marketing Without Spending More Money

Earnings came out for some of the major retailers in the last few days. July is shaping up as a tough month for sales which is also hurting second quarter results.

Back to school sales are down, and retailers are trying to survive. One analyst I heard expect sluggish sales to continue through XMAS. Let’s hope he is wrong.

Quickest way to reverse sales slump is to reverse negative employment trends so that:
1) there is more disposable income in the system
2) the psychological effect gives comfort to those who are employed that it is okay to spend.
However the reversal in employment is s not going to happen soon. We will still be losing jobs for a few more months

Consequently, marketing the centers and your retailers is key to combating declining sales. The trick is to spend minimally. Here are a few suggestions:

1. Bartering with the media – Exchange, physical space in the mall for advertising. Whether asking the media for print or air time, offer up available places on the property to hang the media’s logo and any special event they may want. Consider asking them to co-sponsor an event that the property would have held anyway. Retail properties have numerous signage opportunities:

a) Signs along the property walkways,/mall corridors
b) Inside vacant storefronts
c) Flyers/brochures in upright stands or in soft seated areas, food courts and customer service desks. Also table top advertising and giving out premiums.
d) Existing electronic readerboards – indoor or outdoor

2. Fill vacant store fronts with merchandise from existing retailers – Offer existing tenants the right to fill vacant store fronts with merchandise. In good times you could charge rent for these spaces but in tough times helping your retailers survive is paramount. The property will look more occupied and makes a better appearance. Conversely, avoid filling up an empty wing or side of a center with signs that scream “For Lease”. It will make the center look desperate.

3. Host community service events that attract the media – Food and can drives, blood drives, clothing drives, medical check-ups, reading hour in the soft play area etc. help your communities while you help your property. Talk to hospitals and the County Health and Human Services asking what you can do to help. Speak to local town officials about what is needed in the community. Invite the leading personalities of the community to speak at the event: Town and county officials, mayors and anyone else who might be beneficial to your center. Often they will assist with marketing the event. The media loves this type of news story.

4. Providing retail customers with lists of stores promotions for the week - at central locations will make it easier for them to comparison shop.

5. Co –promote with your retailers - - Sometimes they will want to do their own promotion and pay for it and you may not be aware of it. With a little effort from the property manager or marketing director, tenants may be willing to cross promote in print ads (local tenants often use Penny Saver or Valu-Pak inserts). Ask them for gift cards, discount coupons or merchandise to raffle off at an event or hand out as a promotion.

6. Continually talk to your retailers. Often they have great ideas to help market the centers and may be willing to defray significant amounts of a company promotion.

KEEP MARKETING TENANTS WHOSE RENT IS BASED UPON PERCENTAGE RENT. - Profit goes to your bottom line. Those that by some miracle are near or over your breakpoint keep marketing them as well for the same reason.

KEEP AN EYE OUT FOR ANY TENANTS THAT ARE BELOW YOUR SALES KICKOUT - There may be a slight chance you can save them by promoting their wares.