Net Operating Income (NOI) is everything when it comes to shopping centers. It’s the metric that measures how profitable a property is. This is done through a calculation I will discuss later in this article.
In other words, NOI evaluates the performance of a shopping center. If you want to increase the value of a shopping center, you focus on growing NOI. And there are only two ways to do that: increase revenue or decrease expenses. That’s it. That’s the game.
I’ve spent my career in retail real estate, and my team and I at RockStep Capital are constantly analyzing ways to maximize NOI. Some of these strategies are straightforward, and some require creative problem-solving, but the key is always the same: make the property more profitable. Here’s how we do it.
Revenue growth is the most obvious and direct way to increase NOI. It comes down to filling space, optimizing tenant mix, and finding creative ways to generate additional income streams.
The most obvious way to grow NOI is to get a new tenant in an empty space. It's simple: Open a TJ Maxx in the vacant spot and increase NOI by the total revenues the tenant receives, which are rent plus reimbursements for triple nets.
Sometimes, you’re lucky—adding a new tenant doesn’t even raise your expenses. Oftentimes, when you open up a Maxx, your property taxes don’t go up. So, the actual increased NOI is the revenue received from opening up a new tenant. That’s pure profit growth.
If you have a tenant that isn’t paying market rent, and you can replace them with one that will? That’s a win.
You can trade out a weak tenant for a tenant paying low rent, and you substitute a tenant paying high rent. It’s not just about occupancy—it’s about maximizing the value of every square foot.
Another way to boost revenue is through specialty leasing—short-term tenants, pop-ups, and seasonal stores. Sometimes, those tenants turn into permanent ones. We have specialty leasing for our properties, and in specialty leasing, we're trying to bring in regional and local tenants or temporary tenants and then converting them to what is called converting to perm—to permanent tenants.
It's not just about collecting rent. If you have extra space, you can make money in other ways. For example, RockStep Capital owns The Riverwalk New Orleans, a shopping center by the Mississippi River in downtown New Orleans.
We use the large outdoor area on the property to host concerts and community events. These events strengthen relationships with the local community while drawing in significant foot traffic for the tenants. Overall, you might be surprised by how much money a property can earn beyond just leasing space.
The right tenants bring in the right neighbors. Tenant mix drives NOI because sometimes you'll have a TJ Maxx, and if you get a TJ Maxx, Ross will come in. And if Ross comes in, then you get Five Below.
Retailers want to be near other retailers that complement their business. If you can land one, you might land three or four.
While increasing revenue is critical, cutting unnecessary expenses is just as important. The key is finding ways to operate more efficiently without sacrificing tenant experience or property quality.
One of the easiest ways to cut expenses at a property is to upgrade to LED lighting. If you put in LED lighting, you can save about a third on your utilities by investing in more efficient lighting—fewer utilities and higher lumens. It's a win-win. That’s a simple investment with a fast payback.
One of the biggest missions for my team at RockStep is to be fanatical about details, especially when it comes to budgets for a property. If you don’t watch your expenses, they will get away from you.
At RockStep Capital, we set a yearly budget and constantly monitor it. Every month, the property management team reviews actuals against the budget, and from there, we can start explaining and reviewing variances. Small overages add up. You’ve got to stay on top of them.
One of the biggest opportunities to cut costs is repositioning properties. If you take an enclosed mall and convert it to an open-air center, you eliminate a ton of operating expenses.
If you can demo it or not use the interior, you will pick up NOI because you're not paying for the costs of the interior. You're not paying for AC, property manager, heating, utilities, lighting. You might pick up a hundred thousand or half a million dollars of NOI just by closing off the interior.
Every shopping center is different, and the best NOI growth strategies depend on market conditions, tenant demand, and financial structuring. We analyze each property carefully to make sure we’re maximizing its potential. However, making the right decision is about understanding risks and market conditions.
Every tenant has a level of risk. Flight risk has two meanings—one, they will close and leave. Or, number two, they will demand and possibly get lower rent in exchange for staying.
If you have a full center, you’ve got leverage. If there’s a lot of vacancy, the tenant has leverage. It’s that simple. The higher the occupancy, the more leverage you have. And in today's world, landlords have more leverage than they had three years ago.
Every decision has to make sense financially. That’s why we always consider the debt service coverage ratio (DSCR). If you’re new to real estate investing, DSCR might sound complicated, but it’s pretty simple:
DSCR = NOI ÷ Debt Service
In other words, it’s a way to measure whether your property is making enough money to cover its loan payments. A DSCR of 1.0 means you’re breaking even. Essentially, you’re making just enough to pay the mortgage but nothing more. A DSCR above 1.25 means you have extra cash flow, and lenders like to see that.
Let’s say we put a new tenant in a shopping center, and that tenant pays us $200,000 in rent per year. To get them in, we borrow $1.5 million from a lender at 8% interest on a 20-year loan. That means our annual loan payments (our debt service) are $147,000.
Now, let’s calculate DSCR:
$200,000 (NOI) ÷ $147,000 (Debt Service) = 1.36 DSCR
That 1.36 tells us we’re making 36% more than we need to cover our loan payments. Lenders usually want at least 1.25, so this deal works nicely for us and our lenders as well.
But what if our NOI drops? Let’s say we lose a tenant, and our NOI goes down to $120,000.
$120,000 ÷ $147,000 = 0.82 DSCR
Now we’re in trouble. A DSCR under 1.0 means we don’t have enough income to pay the loan, and the lender will ask questions. That’s why every decision we make—leasing, cutting costs, refinancing—is about keeping a strong DSCR.
When we buy a property, we want to see a high DSCR upfront. That gives us a cushion, reduces risk, and makes lenders more willing to offer favorable loan terms.
The bottom line? NOI pays debt service. If NOI drops below your loan payment, you’ve got a problem. That’s why we focus so much on NOI growth at RockStep Capital: a strong DSCR means stronger, more valuable property.
Over time, we’ve gotten smarter about NOI growth. One of the biggest things we’ve learned? NOI sustainability matters. We have developed a good sense of NOI sustainability. That’s the key term we’re using when looking at a property.
We’ve also learned that some markets just don’t have the demand we need. “Some markets we chose were simply too small or not dynamic enough.
Lastly, we’ve gotten better at understanding mall conversions—when to reposition, when to redevelop, and when to walk away. In other words, we’ve gotten better at working through the mechanics of a mall conversion.
At the end of the day, growing NOI is about being proactive. At RockStep Capital, we are constantly aware of the need to be on top of maximizing NOI at all times. We have to be ahead of the curve. We have to be leading edge. We have to be looking at our competition. We have to be visiting properties. That’s what we have to do.
Retail real estate is constantly changing. The best operators adapt, optimize, and execute. That’s how you win in this business.