Stumbling blocks of the commercial real estate market

# EXPERT #

The situation of the economic crisis, the devaluation of the ruble, a sharp increase in the cost and availability of borrowed funds, reduction of lending programs by banks, outflow of capital from the country, general stagnation of Russian retail, reduction and complete abandonment of programs to develop numerous popular brands, reduction in purchasing power of the population - this is just a small list the problems that the Russian commercial real estate market as a whole has encountered today, and retail real estate in particular. The logical consequence of what was happening is that we are increasingly hearing about the postponement of the opening date of a project or its freezing for an indefinite time.

Another trend was the opening of shopping centers with a large number of vacant areas. A couple of years ago, it was hard to imagine that a conceptual shopping center could be open for visitors to have, with 20-30% of vacant space. Today, in fact, there are often cases when shopping centers open with free premises exceeding 40-50% of the total commercial area of ​​the object.

As a result, today all market participants have become much more demanding on the quality of projects. Customers whose incomes have declined want to buy better products for less money, but still value comfort and a pleasant atmosphere. Investors are willing to invest only in the highest quality facilities, with a low vacancy rate and high profitability. Tenants are ready to enter only those projects where they will be offered the most favorable rental conditions and will provide maximum traffic to the target audience.

Of course, at the same time it is not possible to satisfy the desires and demands of all parties. It is very important to find a middle ground, a compromise of the interests of all participants. Where this succeeds, the project becomes (or continues to be) successful.

It was yesterday

Before the onset of the current crisis, the success of the facility was assessed based on the degree to which the goals and objectives set by the investor when entering the project were achieved, the location of the facility, the vacancy rate in the total commercial area, the quality of the pool of the main tenants, the quality of operation and maintenance of the facility.

I deliberately did not mention the payback period of the project and various financial indicators, since it is far from always the achievement of a high profitability of a shopping center is the main reason for its creation. Each investor, making a decision on joining a project, primarily pursued one of three main goals.

Firstly, increasing the capitalization of your business. The price of an existing facility should always exceed the value of the funds invested in its construction. In addition, a quality retail property is one of the best collateral tools for attracting external financing. To achieve this goal, you need to build quality, use the best engineering equipment, attract famous brands as tenants, conclude long-term lease agreements with most of the tenants, while rental rates here may be slightly below market level. The success of the object in this case is evaluated based on the criteria of reliability and stability of income generation in the future, and not from the point of view of maximizing its cash flow.

Secondly, getting the maximum revenue in the current moment. A shopping facility with a favorable location and a quality pool of tenants is able to generate significant net cash flow. Here we are talking about the maximum extraction of income from the object. And here and now. For this purpose, long-term lease agreements are concluded only with anchor tenants (hypermarkets / supermarkets, DIY, a cinema with an entertainment area, a household appliances store, and catering establishments). All other tenants subscribe to short contracts with a maximum rental rate. In optimal market conditions, this approach allows, if necessary, to carry out rapid rotation of tenants in order to constantly increase rental income.

Finally, ambition was often the third goal for an investor to enter a project. The desire of the investor to have the best shopping center in the region, city, region, territory, republic, etc. In this case, the payback period is no longer of primary importance. The most important thing is that the object is the highest quality, brightest, most popular. However, this motivation at the present time has clearly lost its relevance.

The situation today

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The current economic crisis has made a big difference. The main objective of the investor is the stability of the mall's profitability. And for this it is necessary to maintain the main pool of tenants, to prevent the emergence of vacant space, to optimize the costs of operating and maintaining the facility, while maintaining the high quality of the building’s services, and to constantly maintain high interest from the target audience.

Still, the location of the object is very important. It should be convenient for the target audience of the mall, both in terms of pedestrian and car traffic. The presence of a convenient, well maintained parking lot is mandatory. Any discomfort in this matter will lead to the fact that some visitors will prefer a different place for their pastime. The better the location, the higher the traffic. The higher the traffic, the more interest the object gains for tenants.

For tenants, the willingness of the property owners and management companies to take into account their interests, engage in a constant dialogue, discuss emerging issues and change the terms of cooperation in real time is also of fundamental importance.

The Russian commercial real estate market has gone through various periods. There was a period of "landlord's market," when high-quality space was relatively scarce and project owners could dictate their terms to tenants. Then there was a period of "tenant's market," when tenants set the rules of the game. Just a year ago, in the regional market, projects with the best locations were characterized by "owner's market," while less successful projects were governed by "tenant's market." Now, in my opinion, an era of compromise has arrived. But since the interests of all market participants—property owners, tenants, and shopping center visitors—are often diametrically opposed, reaching a compromise is very difficult. And here, the role of a professional management company is particularly important.

Trust

In Western practice, professional management companies have long been involved in managing shopping centers. Today, more than 90% of shopping and entertainment centers in developed countries are under external control. In Russia, less than 10% of regional malls are transferred to the management of an independent management company. This is largely due to the fact that property owners prefer to manage independently, mistakenly believing that the services of management companies are too expensive, and also in some cases fearing to lose control over their property. Nevertheless, I am sure that in the near future the percentage of regional facilities managed by professional management companies will increase. And there are objective reasons for that.

To begin with, the involvement of a professional management company for the integrated management of an object usually reduces the operational and operational costs of the shopping center by at least 10-15%, even taking into account the costs of remuneration to the management company. Also, realizing the desire of regional property owners to immerse themselves in current issues of shopping and entertainment center management, management companies are gradually abandoning the “one-stop shop” principle, forming closer interaction with the Customer and transferring any required information in real time. In addition, a professional management company must guarantee the owner that there is no vacant space and the most efficient rotation of tenants, if necessary. Specialists of the Criminal Code should understand the specifics of the tenants and serve as the guarantor for the latter to comply with their interests at the facility. The management company is obliged to ensure the operation and maintenance of the building and its engineering systems at the proper level, to provide the necessary level of comfort and safety for visitors.

Naturally, the functionality of the management company is much wider, I have listed only a few basic competencies. I also note that the owners of regional facilities prefer to work with universal management companies that can provide the most complete range of services with relevant experience and skills.

Let me reiterate, the presence of a professional management company on site, acting as an intermediary between all parties and possessing sufficient expertise, is currently one of the key conditions for the effectiveness and success of a shopping mall. But this only applies if there is close cooperation between all parties—property owners, management companies, and tenants—based on shared goals, mutual trust, and respect.