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The Slow Erosion of Value

Every day is a new day. It is better to be lucky. But I would rather be exact. Then when luck comes you are ready.” -The Old Man and the Sea

Waves crashing on a beach

Spend an afternoon on the beach looking at the clouds, the sand, the surf, the rocks and what do you notice about the landscape? How does it change in an afternoon? Although the clouds may move, waves may crash, and the tide may rise or fall, there's not a lot of structural change that occurs. The large rocks appear to remain the same and the sand along with it. However, if you waited and came back a while later (a million years?) you would notice that quite a bit would change. Rocks erode, sands shift, and entire beaches disappear under the relentless forces of nature.

Spend an afternoon at a retail shopping center and you would notice very little. Cars would park and leave along with customers, lights would eventually turn off and storefronts would turn their signs to "closed." A fairly uneventful afternoon. But come back months or years from now and what does that same shopping center look like? Perhaps it looks better than before! Or perhaps you notice the marque signs have faded, the landscaping overgrown, and cracks in the parking lot. Storefronts look tired and there's not as many cars parking and leaving with customers. And so begins the slow erosion of value...

What causes this? There can be many reasons, but the biggest culprit is a lack of planning (or general laziness). Business plans are forgotten (or never created), capital expenditures are neglected for increased cashflows, and no one is held accountable for marketing, property management, or maintenance. Let's take a look at some of these crashing waves slowing chipping away at your investment.

Obsolescence. Properties, unlike land, have a finite working life. Things break as they get old and need to be repaired or replaced on a regular basis. Sometimes these things are big, like roofs or HVAC systems, and sometimes can be small like flowers, signs, or paint. Either way they need to be replaced and maintenance needs to be scheduled regularly. Here's an idea: ask a random customer in the parking lot what they think about the shopping center. I bet they will be brutally honest! Maybe they will tell you things you haven't considered or things that you simply overlooked. Have you neglected certain things to the detriment of tenant sales or occupancy? It's called an investment, because you have to invest in it. Remember, customers and businesses are the lifeblood of any commercial asset.

Indifference. We see this way too often and is a good reason to hire a seasoned asset manager. Having good brokers, property managers, construction managers and others requires constant attention and appreciation. Like a marriage, you have to constantly work at it or things can go sideways. Communicate, ask for ideas, and think about changing things up if you suddenly see vacancy or expenses rising. Perhaps you need some news eyes with a new property management company, or a new broker willing to make cold calls and spend on advertising your property. Either way, don't become indifferent. If you don't care about your property, why should they?

Lack of goodwill. Chalk this strategy up to investors playing the long game. Consider being an advocate for your tenants and customers. Many investors think of real estate as an "I win/you lose" proposition. You go through negotiations with a tenant and continue that same adverserial mindset. Bring them donuts or coffee randomly and thank them for being part of your center. Ask them if there are any needs they may have to help increase sales. How many property owners do that? Do you think a tenant may consider this when renewing? Play the long game. Treat people right and it will pay dividends.

The bottom line comes down to this: take care of people, take care of the businesses and take care of your property. If you don't have the time to do the above, consider professional asset management. Otherwise you mind find yourself with a crumbling investment!


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