Giant retailer Target just filed for bankruptcy and is closing all of its stores in an entire country. So what does this multi-billion dollar fail teach commercial property investors today? How can retail and mixed-use property landlords better build in sustainability and the ability to command top returns for the long term?
Target just announced it will be closing over 100 stores in Canada and shedding 17,000 jobs after losing over $2B on a big expansion bet and retail war with Wal-Mart. A number of factors are likely behind this major fail including; a lack of competitiveness, scaling too large too fast, and not ensuring sustainability. So how can Massachusetts commercial property owners and investors both avoid being hit by failing tenants, and ensure their own sustainability?
Tenant Mix Choosing multi-tenant properties, and maintaining a good tenant mix is smart. Big brand name ‘national credit’ tenants can seem attractive, but Target has proven this isn’t a bullet proof solution, and they lower yields and concessions may soon make them increasingly unattractive.
Rents & Leases Increasing motion towards government intervention on rent control and stricter rent control laws appear to be inevitable. Investors need to keep this in mind when making multifamily and mixed-use acquisitions. When evaluating potential investments it is also critical to review leases. Many of the landlords that Target is leaving still had over 12 years left on leases. Some wisely made the US head office sign on to guarantee those rents. So check leases, what guarantees and in place, and any provisions for rent increases.
Financing Refinancing now while interest rates are low could be one of the best moves commercial property investors will make. It’s likely the last opportunity most will see like this for the next 20 to 30 years. For those that can’t get the mortgage deals they want on new acquisitions due to buying distressed or non-performing properties, don’t give up. Shop around, and consider mini-perm loans, short term hard money, or crowdfunding until the property is optimized.
Energy Efficient Improvements With energy making up such a substantial portion of operating costs making energy efficient improvements can go a long way toward building in environmental and economic sustainability for investors. Taxes Most commercial real estate investors continue to allow their net returns to be drained by a variety of taxes. Consider challenging property tax assessments and using self-directed IRAs.
Reserves Scaling is great. Leverage is great. And taking advantage of the amazing deals on the market is great. However, don’t forget to consistently build up reserves for the unexpected.
Pro Property Management Today’s tech savvy, performance focused property managers can be incredible partners in minimizing expenses and liabilities, while maximizing net income and property values.
Summary Making sustainability in all of its meanings a main focus in 2015 will separate the long term winners from the Targets. Large companies may even need to delegate a sustainability ambassador or Chief Sustainability Officer to guide their organizations going forward. Individual investors and small firms on the other hand may be able to defer much of this to great property management firms which share their vision.