Anti-Crisis Strategies – Who Wins?

In order to hold on to their tenants, property owners today are being forced to make considerable concessions. More often than not, they agree to lower rents. Reductions range from 10–50% for periods of three to six months, said Olga Zorina, Director of Real Estate, Office Building and Shopping Center Management at CB Richard Ellis. In each case an individual strategy is worked out as to whether there should be a reduction, on what conditions, by how much and so on, she said. “We are lowering rents by up to 15–20%,” said ROSS Management General Director Vladimir Stukan. “But we are doing this on an individual basis and in complete anonymity – we even sign letters of nondisclosure.” The average rent reduction is 8%, he said. Mr. Stukan questioned the sincerity of an open letter issued by the Association of Retailers (APRIM). “Many tenants really are in a very difficult situation and they will have an extremely tough time managing without our help. And we understand this. But one of the initiators of this letter is the owner of a major chain that was inefficiently managed even before the crisis. All this raises suspicions about its speculative nature.”

ROSS Management nominally divides all tenants who ask for a rent reduction into three groups. The first group it classifies as feigners, who cite the crisis as an excuse to cut expenses. The second group includes tenants for whom a rent reduction will not help – there is no point working with them and it is simpler to just part ways. In the third group are tenants who are experiencing temporary difficulties. “With them you can come to an arrangement,” Stukan said. Zorina said it was pointless to talk about rent discounts without sales reports. If the property owner and tenant are to reach an agreement, such reports need to be provided monthly, she said.

“We do not sit down to negotiations if the tenant cannot provide financial reports,” Stukan said. “We need to analyze not only the dynamics of revenue, but also the dynamics of shopping – what if the problem is with not just one store, but the whole shopping center?” Another strategy during the crisis is to switch to charging a percentage of turnover. Retailers see this as fair – we depend on each other and should try to survive the crisis together, according to Stockmann spokesman Vadim Nikolaev, among others. Alexey Lazutin, Director of Commercial Real Estate at Becar Realty Group SPb, said that property owners could even benefit from this arrangement. “Shopping centers with the best concepts and locations can not only maintain the previous volumes of revenue, but even increase it.”

Stukan said his company was prepared to consider such proposals as one option for a crisis-management strategy. But there are complications, as even a successful shopping center might have tenants with poor financials. What to do if foot traffic at a shopping center does not decline but its business gets worse and worse? “In many cases tenants themselves are to blame: a bad product range, insufficient range of sizes, unprofessional sales personnel, weak advertising in support of their store and so on,” Zorina said. “Making rent dependent on the sales of such tenants is unfair to the property owner. We are prepared to consider such arrangements but only with a limited circle of tenants.” “It’s extremely important to find the right partners, with which one can play such games,” MOST Marketing managing partner Victor Larionov said. While in Moscow stores the situation with the “right” tenants is more or less clear, the situation at regional malls is far worse. “The mentality of some salespeople has not changed since Soviet times. ‘Don’t touch white clothes with your hands,’ shoppers hear when going into their stores. How can one live with such tenants on a percentage of turnover? Where do you find the right ones?” a representative of one regional shopping center wondered. Lazutin said the first to propose switching from fixed rent to a percentage of turnover are usually tenants of less successful shopping centers. Property owners are also prepared to consider other options in relations with tenants. For example, instead of reduced rent some property management companies are proposing other concessions, such as a reduction or even elimination of fees for advertising promotions.

Rents are not falling at all shopping centers. Mr. Lazutin, who is based in St. Petersburg, said tenants are not being offered discounts yet, but one can expect a steady drop in rents closer to spring, along with a gradual transition to a system based on a percentage of turnover. At present, tenants are only being offered discounts at new properties in order to occupy vacant space, he says. More or less successful shopping centers are trying to optimize the composition of their tenants and prepare a waiting list in case “discounts don’t help.” But where can you find tenants “just in case” if retail chains all start closing stores? “Poach,” says one owner of a large shopping center. The trend of tenants migrating from some shopping centers to others is becoming a reality, Zorina agreed. “The crisis will liberate the property market from a poorly thought out concept, bad location, as well as shopping centers that did not manage to promote themselves and rent out all their space. The stronger shopping centers will have an opportunity to pick up tenants if the latter, of course, fit into the property concept and are solvent,” she said. Experts predict that weak shopping centers will become deserted very soon. “This is a chain reaction. When the proportion of vacant space in a building exceeds 30%, shopping malls become deserted – shoppers stop going there. Sales will fall and other tenants will also start leaving,” Zorina said. Interestingly, not only retailers that are currently suffering a slump in sales are talking about discounts, but also tenants that are doing well. They do exist. Cinema chains, for example, are booming. People, tired of news about the crisis, are going to the movies. “Today multiplexes generate foot traffic, so they have every reason to dictate the rules, as was done to them until just recently,” said Larionov. “This tendency is a good illustration of the general trend – the tenant’s market, which was talked about for so long in theory, is here.” “There are cases where key tenants are occupying space at shopping centers free of charge. If there is no anchor, then who will generate a flow of shoppers? “In St. Petersburg, I’ve already come to know one case of this kind – the company is paying only for utilities,” said Dmitry Zolin, Managing Partner at London Consulting & Management Company (LCMC). As for the standoff between tenants and property owners that has been continuing for months, experts recommend finding a compromise. “The tenant and property owner are sailing in the same boat. I would advise them to reach an agreement and look for solutions together,” said Dirk Wiechner, Director for Europe, Russia and the CIS and Head of Retail Real Estate at Jones Lang LaSalle. “Property owners cannot constantly lower rents, because they themselves have obligations to banks,” he said.

“Tenants need to understand that by dictating terms and taking rigid positions they are in no way helping to improve the situation,” Zorina said. “The most reasonable thing to do would be to join forces in the fight for shoppers, rather than weaken one another’s position in an already difficult situation.” However, many property owners are not being reasonable in the midst of the crisis. It is good when it is possible to negotiate with a property owner, but some of them have still not grasped that rents need to be lowered, Larionov said. “They insist that last year they wrote 15% growth into their budget, so let the management company do its job, that’s what it is being paid for.” Reasonable property owners understand quite well that the current crisis will end sooner or later, so they are optimizing spending on promotion of properties. “By cutting costs on everything unsystematically, you can easily end up with nothing. During a crisis it is extremely important to maintain and strengthen your image,” Larionov says.

Experts also agree that the time has come for joint decision-making with tenants. For example, it would help to involve anchor tenants in a number of key decisions, such as in the area of marketing and mall promotion.