Rent Resolutions for a Weak Economy (JPM)
IREM member reveals ways to work with commerical tenants in hard times
by Richard Muhlebach
The following is an excerpt from the Mar/Apr 2009 issue (Volume 74, Number 2) of JPM�, Journal of Property Management.
Many commercial tenants encounter financial challenges during a weak economy and some will have trouble keeping their rent current. Retail tenants are among the first businesses to suffer when the economy becomes fragile, as most people typically reduce their expenditures on just about everything except for essentials. National retailers will develop a plan to survive a weak economy and often come out of it stronger by shedding poor performing stores, refocusing on their core cliental and cutting costs.
During an economic crisis, some national retailers will announce store closures and a few will file for bankruptcy. Local retailers, who make up a large percentage of the tenants in unanchored and anchored strip shopping centers, face additional challenges. They usually have one store, so the success of that store determines their fate. Because each retailer contributes to the success of a shopping center, if one is failing and eventually goes out of business it can cast a poor image on the shopping center. In a good economy this tenant is usually replaced in a few months and the shopping center continues to do well. However, in a poor economy, vacancies take much longer to lease and are often lease at reduced rents.
As property managers, our typical response to tenants who cannot pay rent on time is to work with them for a only short period of time. If the problem persists, it may be easiest to replace the tenant. However, a weak economy can often make it difficult to replace tenants, so in these challenging times, property managers and property owners must find non-traditional solutions to the problem.
Some of the solutions provided below will sound distasteful to many property owners, but in extenuating circumstances they may be the only ways to save tenants and the rental stream the tenant spaces provide. Before considering any of these solutions, you should analyze the impact of vacancies on your properties, especially shopping centers.
Market Factors
The most important factor to consider is the financial status of the property and possibly the property ownership. Can the property absorb additional vacancies and loss of income? For how long? The next factor is the condition of the leasing market. How long will it take to re-lease a space? What will it cost in lost rent, rental concessions, tenant improvements and other leasing costs to replace tenants? If the property is a shopping center, what impact will additional vacancies have on the traffic to the shopping center, the image of the shopping center, and the morale of existing tenants and tenant prospects� perceptions of the shopping center?
The full article is available as an online exclusive in the Mar/Apr 2009 issue (Volume 74, Number 2) of JPM�, Journal of Property Management.�
IREM Members have free access to the JPM� online archives and the �Online Exclusives,� articles that are only available on the IREM Web site. Non-members can subscribe to JPM� at www.irem.org/jpm.�