The challenges of the recession forced retailers to change their strategies to stay afloat, and as the economy begins to improve, more retailers no longer see growth as an end in itself.
Retail firms now aim to grow smarter, making the most of existing properties and exercising more caution in deciding when and where to expand. This shift has only continued to spur interest among retailers in outsourcing real estate services to outside brokerages, continuing a trend that persisted throughout the recession.
Executives with brokerages say that their business has grown in recent years as retailers outsourced more and more duties previously handled in-house, primarily to reduce expenses. Some retailers laid off their entire real estate departments, says Kevin James, senior vice president of retail at Cassidy Turley, a brokerage with offices across the country.
Even as retailers start ramping up for new growth, they continue to see value in the breadth and depth of knowledge that brokerages and other real estate consultants offer, which often exceeds the scope of market data readily available in house. Unlike an individual retailer, a brokerage can achieve economies of scale by using its far-flung staff to mine data and scout locations for multiple clients simultaneously.
“We see a bigger picture, because we’re not just viewing one retailer,” says Eileen Mitchell, executive vice president of RCS Real Estate Advisors in New York. “We see a lot of different situations.”
With more retailers interested in outsourcing, brokerages have had to adapt to their clients’ changing needs to stay competitive. This has translated into adding staff, updating data-gathering technology or beefing up databases to provide increasingly thorough information about markets, trends and demographics.
Firms that offer outsourcing services offer a variety of structures for their relationships with their clients, whether they rely on brokers based in the field or establish a unit housed within a client’s offices. Such firms uniformly report that among the range of services they offer, the greatest demand from retailers is for optimizing their existing locations. Landlords might not like hearing it, but “if you maximize real estate, you don’t necessarily have to open more doors to increase productivity and sales volume,” Mitchell says.
Some of RCS’s clients, for example, have been looking to renegotiate leases on the bottom 20 percent of portfolios. This might involve closing one underperforming location and opening another at a more promising site in the same market.
To meet growing demand, RCS has added several staffers and expanded its database to include criteria such as demographics, sales data for other retailers in the area, and which tenants are entering or leaving the market. Mitchell frequently travels to sites to inform her decisions with on-the-ground observation of properties and project sales. “We never make a decision without actually looking at a mall itself,” she says.
As with other brokerages, Mitchell and the RCS staffers who deliver outsourced services come from a retail background. This enables them to sympathize with their clients’ needs, she says.
Cassidy Turley has also been growing. The firm has hired additional staff to devote to research and increased its store of demographic, psychographic and mapping data. As retailers increasingly seek to outsource services, they want brokerages to be able to serve as “one-stop shops,” says Cassidy Turley’s James. James’s peers identify this trend as well. For the retailer, it’s easier to manage one outsourcing arrangement than several.
Tenants want to work with brokerages that can adapt to their demands, James says. “If you can’t do that, they’re going to move on.”
Much of Cassidy Turley’s work in recent years has been focused on researching markets outside of major metropolitan areas. In secondary markets, there is typically less data available and so more fact finding that needs to be done. The brokerage’s field staffers work to determine comparable sales of similar stores, which can sometimes entail talking to managers or sitting in restaurants and counting cars in parking lots, James says. The goal is to ensure that tenants get deals on par with other activity in the market.
DAVACO, a Dallas-based services company, has employed increasingly sophisticated technology to stay competitive in the outsourcing business. Its employees use a proprietary technology, ClearThread, to gather and deliver data to clients about retail locations.
Its field employees use Sprint Pocket PCs to report on projects in real-time, says DAVACO CEO Rick Davis. The data is then aggregated on a Web portal that clients can use to review and track progress on sites. Soon the ClearThread technology will be adaptable to other platforms besides the Sprint devices, Davis says.
This data-gathering can be intensive. One of DAVACO’s clients asked field staff to answer 300 questions about each one of its 3,000 locations. With such demands, it’s obvious how outsourcing can save time and resources for a retailer. “If you can really see what’s going on in every location you have that’s being retrofitted or remodeled, you really don’t need as many people as you used to have,” Davis says.
As with other consultants, DAVACO’s clients have increasingly focused on revamping locations to optimize earnings, whether by adding or removing product lines or departments or rightsizing stores to better fit an area’s demographics. Much of the focus is on the most profitable and productive stores, according to Davis.
Davis says his brokerage in particular was able to avoid much of the damage of the recession due to its focus on remodeling and refreshing sites, rather than new construction. It has bulked up its staff over the past 18 months to meet the demand from retailers who have shifted their attention from adding sites to improving their existing real estate.
More science than art
Whereas retailers once looked at handling assets and leases as a liability, they now see opportunity, says Lew Kornberg, managing director of corporate retail solutions for Chicago-based Jones Lang LaSalle. Kornberg’s unit helps retailers cut costs with strategies such as negotiating short-term concessions with landlords or making sites more energy-efficient.
Lease negotiations may include asking a landlord to enhance a site and contribute amenities such as a new HVAC system in exchange for an early lease renewal for a longer term. Meanwhile, an energy and sustainability unit within Jones Lang evaluates assets and suggests cost-saving measures such as new lighting, ventilation, refrigeration or window glass that reward investment within a relatively short period of time.
The brokerage firm has seen particularly rapid growth in its retail-development strategy group, which uses analytic modeling to help retailers understand how to better target their customer bases. The services are increasingly in demand because “everyone wants to use facts as the basis of their decision,” Kornberg says. “There’s a notion that it’s both an art and a science, but I think there’s a strong desire to use as much science as possible to mitigate the downside risk.”
Kornberg’s unit within JLL has doubled in size over the past three years, and its research and strategies group has expanded from one person to five. All of the employees share backgrounds as in-house real estate professionals for retailers before joining Jones Lang. Kornberg formerly handled real estate and development for Hollywood Video before forming The Standard Group, a small consulting firm acquired by Jones Lang in 2008.
Dallas-based restaurant chain Bar Louie is among Jones Lang’s newer clients. Late last year the chain decided to open 10 new locations in 2011. It asked Jones Lang to assemble team in major markets to size up possible sites, focusing primarily on second-generation space.
The chain and Jones Lang studied both open and defunct Bar Louie locations, using modeling to determine which elements made for successful sites. Jones Lang then found neighborhoods that would be suitable based on those criteria.
“They have people in place that can hit the ground running,” says Chris Devlin, senior vice president of new business development for BL Restaurant Operations LLC, Bar Louie’s parent company. “It’s an ideal situation for us.” In fact, as Devlin spoke, he was driving around Boston scouting potential locations.
Bar Louie went to Jones Lang less to save money than to accelerate its expansion, Devlin said. The chain learned from the downturn not to build in an outlying location and wait for development to come to the area, he said. Instead it’s looking for real estate in more mature areas less affected by the downturn, but where other restaurants may have encountered challenges in maintaining a solid footing.
Bar Louie also used Jones Lang’s services in relocating its corporate offices from Chicago to a site in Dallas that could be converted quickly and easily.
New approaches to growth
Retailers who took a bigger hit during the recession have entered this year with different outlooks on growth, reshaping their outsourcing needs. DAVACO has seen its clients refocusing on their core business, such as Pier 1 Imports, says CEO Rick Davis.
“Growth for growth’s sake and at all costs is a thing of the past,” says Jones Lang’s Kornberg. Retailers increasingly want to develop plans for expansion based on data and less on instinct, he says, increasing demand for the analytical modeling that Jones Lang offers.
“That’s what came out of this recession in terms of real estate strategy—we can’t just continue to grow a footprint,” says Mitchell of RCS. “You need to optimize the existing portfolio, whether that means closing stores, opening, renegotiating leases. You have to keep monitoring it.”
Some retailers were burned during the recession after opening stores in outlying locations that failed to see anticipated population growth. They’re now less willing to take similar risks moving forward. They were also stung by deals struck with landlords in which they agreed to open stores in less-desirable locations in exchange for moving into higher-profile sites. RCS has been working cotenancy protections into its clients’ leases and leaving room for some clients to get out of leases early if a site is underperforming.
Kornberg’s clients are considering more carefully the size of their stores. In addition, the rise of social media has prompted retailers to focus on improving their shoppers’ experiences, as consumers increasingly share their raves and rants on social-networking sites.
Retailers are adapting to the consumer’s growing emphasis on value, says Anthony Buono, executive managing director for retail services at CBRE. Buono also sees a desire among retailers to downsize stores to achieve greater efficiency. As a result, retailers are seeking to hold less inventory in-store due to the cost of storage.
As retailers return to a growth strategy, some are hiring back real-estate staff that had been laid off during the downturn. This doesn’t necessarily mean an end to outsourcing, however. For the brokerage, it means working with a different set of contacts on the retailer’s side—a development that Cassidy Turley’s Kevin James welcomes.
“Rather than reporting to the COO or an operations guy in some cases, now we have somebody who speaks our language—a director of real estate to communicate with,” he says. “With that comes a little bit better planning and communication on what the company wants to accomplish.”