Cutting Corners (4/2)
Apr 2, 2009 3:56 PM, By Elaine Misonzhnik
Faced with falling property incomes, owners of retail real estate look for creative ways to slash spending.
Terms of service
Almost every property owner and manager out there has been busy renegotiating contracts with service providers, including cleaning crews, landscapers, electricians and plumbers, as a way to cut expenditures. Marinita Development, for example, has asked all its long-term vendors to reduce their rates because of the unfavorable market climate. Given the fierce competition for jobs, most have been happy to oblige, according to Fawcett. The savings have ranged from 10 percent to 20 percent, depending on the service.
“A lot of them are doing it voluntarily because they don’t want to lose you as a customer,” Fawcett notes.
As an added incentive to cut rates, Levin Management is offering its vendors longer term contracts. So in exchange for reducing its prices by 10 percent to 15 percent, the vendor could get the client to sign up for an extra two years of service, says Evans.
Levin has also been looking at cutting back on the hours of service where possible. At some centers, it eliminated one day of sweeping at the parking lot. At others, it reduced the number of hours during which the centers have a security presence on-site. And in certain cases, the firm replaced off duty policemen with private security firms. The pay rate for private security guards can be up to 25 percent lower than that for off duty policeman, according to Robert Carson, executive vice president with Levin.
PREIT, meanwhile, expects to see approximately $1 million in savings from cutting the hours or eliminating altogether customer service booths at some of its regional mall properties.
Many owners and managers have also been making adjustments in their landscaping practices and postponing small-scale renovations. Levin, for example, has been trying to use perennial flowers that don’t need to be watered frequently to cut back on the need for plantings and water use. Forest City might forgo spring plantings at a few of its centers altogether this year, according to Gilkeson.
Robert B. Aikens plans to avoid making any large-scale capital improvements to its properties in the near future, though Thompson concedes the decision was not easy. “It’s so important to maintain the look and the image of these shopping centers that it’s hard to stop spending money,” he notes.
How much is too much?
Some cost-saving measures adopted by retail property owners, however, have been more controversial than others. Since January, several regional mall owners, including Simon Property Group, Westfield Group and Forest City Enterprises, have reduced operating hours at some of their centers, by half an hour to an hour a day. PREIT is about to institute the measure as well. But while the move might help the owner save on utilities costs and ease the burden for struggling retailers, it might not be the wisest decision in the long term, according to Fawcett.
“When things get tough, you want to do more [for your customers], rather than less,” he says. “I think their sales are going to decrease proportionately to the amount of hours they cut.”
Measures such as cutting back or eliminating a security presence and not sweeping the centers as often have also raised eyebrows. Thompson, for one, notes that since the economy took a turn for the worse his firm had to bring in nighttime security at centers where it hadn’t done so before because of an increase in theft and vandalism. And skimping on the amount of effort that goes into housekeeping is not the way to survive a downturn, adds Glickman.
“I think it’s totally crossing the line,” he says. “Shoppers notice those types of things. It doesn’t work.”
Fee-Based Service
Harsh business conditions are putting pressure on retail property owners to save money wherever they can, but some of the methods they are employing may end up being counterproductive, experts warn. When CBL & Associates Properties, Inc., a Chattanooga, Tenn.–based regional mall REIT, opened the first phase of its 750,000-square-foot Hammock Landing project in West Melbourne, Fla., last month, the developer began charging shoppers for the infrastructure improvements it made to the site. CBL and its partner, Amherst, N.Y.–based Benchmark Group spent up to $30 million on roadway, water and sewer work, according to a spokesperson for the company.
To recoup the money, the developers asked the retailers at Hammock Landing to add a one percent “public user fee” to every customer purchase.
Until today, such fees have not been a common practice in the retail real estate community, says Jeff Green, president of Jeff Green Partners, a Mill Valley, Calif.–based consulting firm (this is the first time CBL has instituted the measure). And given the current market environment and the demographics of the West Melbourne area, Green notes that whatever savings the developer will realize with these fees, the negative publicity the move will generate will outweigh them.
“This is a smaller, secondary market; there are other options and places to shop,” he says. “The consumer these days is mad enough, certainly at our government and our financial institutions. The last thing they need to be mad at is the retail developer.”
As of 2007, West Melbourne had a population of 15,175, with an average household income of $55,765. In addition to Hammock Landing, the area houses another major retail center—the 710,053-square-foot Melbourne Square Mall, owned by Simon Property Group.
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