The Real Estate “Occupy Movement” : The Last 10%

The Occupy Movement

The Occupy Movement started in 2011 when an activist blogger in New York started a Tumblr post entitled “We Are The 99 Percent” with a focus on income inequality, among other things, and spawned the Occupy Wall Street and other Occupy events at that time. The blog was inspired in part by economist Joseph Stiglitz’s May 2011 Vanity Fair article “Of the 1%, by the 1%, for the 1%” where he observed that 1% of the US population take home nearly 25% of the nation’s income, and control 40% of the nation’s wealth.

Occupying the Last 10% in Retail Shopping Centers

This blog post is about another Occupy Movement that preoccupies every owner in our industry, and that is the push to get all of the GLA occupied in our centers. Occupancy equals cash flow and value, the end game of the ownership of real estate.

When I worked as a portfolio manager for a shopping center REIT, our COO had a saying that has stuck with me to this day, “Every dollar a day sooner.” He said that to keep everyone’s focus on getting our vacant spaces leased as soon as possible – to limit downtime, and to push for maximum lease dollars. This is the job of every owner.

The Cash Flow Impact

Every square foot of retail space is worth anywhere from $0.50 and $4.00 per square foot per month, depending on the market, and location of the space within the center. So, a 1,000 SF space is worth anywhere between $500 and $4,000 each month. And NOT leasing that space “costs” its owner $500 to $4,000 per month. Adding in NNN charges (typical for most leases), the opportunity cost moves to $950 to $7,300 per month, equating to anywhere from $11,400 and $87,600 per year.

I don’t know many people who would not want the opportunity to have additional cash flow like this!

There are mitigating circumstances that may make it difficult to get every square foot leased, but the goal of every owner is to lease up vacant space.

For instance, an owner with 5,000 SF of vacancy in his or her portfolio, with rents of $15 PSF annually, and NNN costs of $3 PSF, leasing the vacancy brings in $90,000 extra income. For 20,000 SF of vacancy, and rents of $20 PSF (and NNN costs of $3 PSF as an example), that adds up to $460,000.

The Value Impact

This additional income has a far greater effect on value.

Using a 6% cap rate as the “market” for valuation of a center, the impact of leasing space is as follows (market rents across the top row, GLA leased along the left column):

SF/Mkt Rent $5 $10 $15 $20
5,000 $670,000 $1,080,000 $1,500,000 $1,920,000
10,000 $1,330,000 $2,170,000 $3,000,000 $3,830,000
15,000 $2,000,000 $3,250,000 $4,500,000 $5,750,000
20,000 $2,670,000 $4,330,000 $6,000,000 $7,670,000

As one can see, that additional cash flow has a huge impact beyond the immediate cash flow benefit. This impact is not only affects a sale, but also affects financing proceeds, and in most cases, financing terms. Lingering vacancies can be perceived as market weakness, or a functional problem with a certain space, however it may be perceived as sponsor (borrower) weakness and affect loan terms. Not always the case, but one wants one’s best foot forward at all times.

While some underwriters may still apply a market vacancy factor to a center, beginning at the highest possible number is always the best place to start.

A Solution For The Last 10%

Sometimes it is difficult to get leasing agents to focus on these last spaces in a center. We propose that owners consider contracting a company on a fee basis in order to “stand watch” on these last spaces. This contract amount benefits in several ways:

  1. The amount does not need to be onerously large
  2. The fee could be included in a monthly management fee, to be included in NNN charges
  3. The incentive on the remaining space will be focused on fulfilling the contract obligation and less focused on the leasing fee, which in most cases is small
  4. The leasing firm would welcome the recurring revenue which benefits their EBITDA and value
  5. Having a leasing person paying regular attention to the center may lead to other larger opportunities and will increase ownership’s exposure to market trends

Reach out to our team to discuss your portfolio, including and any lingering vacancy issues so that we can proactively come up with a plan to add cash flow and improve the value to your portfolio.