Retail portfolio management is getting to be a complicated business. Many retailers maintain real estate departments. But for those looking to outsource, Hilco Real Estate LLC, a Northbrook, Ill.-based firm, has launched a Retailer Solutions group to compete in this arena.
Hilco has built a reputation as a real estate disposition firm and offers mainly portfolio right-sizing services:termination, property appraisal, asset disposition and renegotiation of rental terms. The Retailer Solutions group, however, will be able to handle all of its clients’ portfolio management needs, including helping draft an overall real estate strategy, choosing sites for new stores, analyzing existing store performance and brokering real estate transactions. As such, Hilco is entering a business where it will compete with the likes of CB Richard Ellis, SRS Real Estate Partners and as well as site selection specialists like Buxton LLC.
Hilco has tapped Barry D. Kaufman to head the new group. Kaufman was most recently a consultant and previously served as president and CEO of Limited Brands Real Estate and in the course of his 30-year career handled real estate for retailers including Sears Roebuck and Co. and the May Department Stores Co.
Maxine Clark, founder, chairman and CEO of Build-a-Bear Workshop, lauded Hilco's choice. “Barry is an experienced retail real estate executive with department store experience that may be unparalleled,” Clark says. “Barry knows firsthand what the best retailers are looking for and need in a partnership with their landlords and what landlords need as well. He has lived through high-growth and more stable times and has the experience and relationships needed to work with a wide variety of clients.”
Given the uncertainties of the business climate, retailers can no longer rely on the old real estate model. He feels that retailers have been too opportunistic in signing new. And at the same time, the constant addition of new product on the market made it easy for retailers to find locations. Going forward, those chains that hope to be successful will need to work out comprehensive long-term real estate strategies that will take into account not only the cost-benefit analysis of opening new stores, but their chains’ long-term business goals.
“I think that much of the real estate activity [in the retail sector] historically has just been-driven, so there hasn’t been the analytical work and the benchmarking that would permit a dialog between the senior management team and the real estate team about new stores and about exactly what should be done with old stores,” Kaufman says. “There just wasn’t dialogue to get the senior management and the real estate people to an alignment. For us, the key is to work with retailers to develop and execute new and really customized strategic plans that will maximize brand productivity and profitability.”
The changes Kaufman sees coming to the industry are not due to lower consumer spending and greater economic uncertainty alone. In the past 40 or so years, retailers got used to being presented with expansion opportunities on a regular basis as the real estate industry continued to add new malls and shopping centers to the U.S. landscape.
That chapter in the evolution of the U.S. shopping center industry is now over, Kaufman says.
Going forward, Kauffman expects real estate developers, the larger public REITs in particular, to concentrate primarily on acquiring existing centers to drive growth, rather than build new ones. That will force retailers to think more strategically about which centers they need and want to be in, and which centers they ought to exit.
To help their clients figure out how to navigate this new world, Hilco’s Retailer Solutions group will offer services in four main areas, which could be purchased either as a complete suite of products or in parts.
These will include benchmarking and analytical work, with Hilco analyzing existing store performance and comparing it against occupancy costs; real estate strategy and targeting work, which will help firms figure out how many stores they need to have and in which locations; transactional services, which will include lease negotiation and site acquisition and disposition; and post-audits of existing locations that will help determine whether the stores are producing the needed returns and whether the agreed upon real estate strategy has been a success.
One of the outcomes of retailers trying to cut operating costs in recent years has been the decline in the scope and capabilities of their real estate departments, says Ivan L. Friedman, president and CEO of RCS Real Estate Advisors, a New York City-based retail real estate solutions firm that provides many of the same services as Hilco’s new group.
In-house real estate departments don’t create revenue so they were the logical area for payroll cuts, he notes. But as market conditions improve and retail chains start planning for the future, many times they find they don’t have the resources necessary for strategic portfolio management.
“A lot of companies at this point are pretty short-handed,” Friedman says. “And by outsourcing they get the benefit of using multi-faceted companies that have people with a full gamut of real estate experience. For instance, internal real estate departments kind of loathe doing lease restructuring. It’s something they don’t like to do. Outsourcing gives you [greater] ability to do that, as well as giving you other services like the ability to evaluate new locations.”
Friedman agrees with Kaufman’s assertion that retailers are becoming more selective about which centers they want to go into, focusing on malls they view as offering the greatest productivity potential. Though market conditions have certainly improved from what they were a year or two ago, most chains have learned the lesson about over-expansion and remain extremely cautious about opening new locations, Friedman notes.
Kaufman says Hilco is currently working with several foreign-based fashion retailers who are looking to expand into the U.S. market, as well as evaluating the existing store portfolios of maturebrands. (He declined to name any of his clients). He also would not discuss Hilco’s pricing on its Retailer Solutions products, but noted that it was competitive with what most retail companies would have to pay to maintain an in-house real estate department.
“At the end of the day, quality of service is what this is about,” he says. “But from a cost standpoint, as a former head of real estate, I can tell you unequivocally that the cost of these fully out-sourced real estate services does not exceed what the cost was in-house.”