In the intensely competitive retail services business, firms that focus on property management are getting involved in retail development any way they can, hoping that their participation on the front end will lead to management assignments once the property is completed.
From providing site selection and viability studies to deliveringmanagement services to investing equity and providing asset-management services, these firms are eager to boost revenue.
“I see it as a business where we are doing everything possible to add another layer of value for our owners,” says Todd Caruso, senior managing director of CB Richard Ellis Inc. based in Bannockburn, Ill.
And because developers are increasingly insistent that a management company “put some skin in the game,” a few firms including Jones Lang LaSalle Retail, Urban Retail Properties Co. and Prizm Partners, are considering investing in retail projects that they will manage.
“We used to say that we didn't want to put money into the, but in order to get the management and leasing, clients are telling us that they want an operating partner type of agreement; they want our money to be their money,” says Greg Maloney, president and CEO of Jones Lang LaSalle Retail. “It's the only way to expand business. So in order to be competitive we had to change our philosophy.”
Over the next five years, Jones Lang LaSalle Retail plans to pursue equity relationships with small developers, Maloney says. The firm is nailing down several development projects in which it will take a 5 percent to 20 percent stake, though he won't reveal specifics. The equity program is funded completely through Jones Lang LaSalle and does not have a maximum limit.
The move is significant not only because it signals Jones Lang LaSalle Retail's foray into ownership, but also because it moves the firm from a sole focus on regional malls to a broader involvement with other retail properties such as lifestyle centers, power centers and mixed-use projects.
But it's not abandoning its regional mall business. “We're going to continue to grow that,” Maloney says, adding that over the past three years, the firm has doubled its revenue and now manages a 34-million-square foot portfolio for more than 30 owner clients.
Additionally, Jones Lang LaSalle Retail has bulked up its development capabilities to six in-house experts and now offers a range of services including land planning and construction services. It recently hired Joseph Caprile, formerly a principal at Lohan Caprile Goettsch architects, as a vice president in its Projects and Development Services Group in.
Dallas-based Prizm Partners is considering partnering with several of its institutional clients, says CEO J. Scott Weaver.
“The equity partner role is one of the expanding areas of our business,” he notes, adding that most institutional clients have a big appetite for new and existing retail properties but have difficulty finding lucrative investment opportunities: “They prefer to go to a partner who has a lock on the property and who may contribute some equity.”
Holding off on equity
Although Prizm hasn't yet committed to any equity deals, the firm has picked up a few new assignments over the past 12 months, Weaver says, bringing its total management portfolio to just over 4 million square feet from right around 3 million square feet a couple of years ago.
And while Urban Retail has also added to its management portfolio over the past several months, it, too, is evaluating the potential of returning to its previous incarnation as an investor, says CEO Ross Glickman.
The Urban Retail management buyout from affiliates of Westfield America Inc., Simon Property Group Inc. and General Growth Properties Inc. in 2002 no longer precludes ownership.
“We are not shying away from third-party management,” Glickman says, adding that today, the Chicago-based company manages a retail portfolio of 50 million square feet in 28 states for 50 clients. “But, we are looking for other revenue sources.”
While Glickman wouldn't provide specifics, saying that a pending announcement could soon make things clearer, he pointed to the role Urban Retail played at Branson Landing as a case in point when it comes to its consulting practices.
Urban Retail provided consulting services for the huge mixed-use development in Missouri. Moreover, it has plans to develop and own residential housing, he says, but those deals have not progressed to the point where he feels comfortable discussing them.
Consulting is becoming an ever more popular way of bringing in new revenue. Boston-based Finard Co. offers research and consulting services to retail developers by helping them determine the best locations for new projects.
“Research had always been an internal focus and we've turned into external focus,” says Mark Becker, partner and CFO of Finard Co.
The 53-year-old firm has added 2 million square feet of retail management assignments over the past 12 months, bringing its total to 11 million square feet throughout New England and the mid-Atlantic. Additionally, Finard has added an office in Washington, D.C. and bulked up its management and leasing team to 100 people.
Although Finard is eager to help new and existing clients with its development expertise, it has no immediate plans to invest equity into any new projects or to become a developer on it own, Becker says. Finard is concerned that owning property could create a conflict of interest with existing and future clients.
There are other ways to make money by insinuating themselves in the development process, says Alan Zell, president of Zell Commercial Real Estate Services: “From a moral and ethical standpoint, I feel that we shouldn't mess with the people who feed us,” he explains.
The Phoenix-based firm, in business since 1977, has never owned properties or been a joint venture partner, but it is expanding its consulting businesses, which includes overseeing construction.
Zell Commercial has expanded its pool of potential clients to include developers at an early stage in the project, rather than just investors and owners of existing projects.
“We have emphasized our other fee-related services to add revenue to our company's coffers,” Zell says. For example, the firm is focused on aligning itself with local and regional developers to facilitate the entitlement process.
Additionally, Zell Commercial now offers project management services, which includes overseeing the construction process as well acting as the liaison for all vendors and subcontractors.
“Previously, we were only looking to do business with people who invested in existing properties, but now we feel that we need to get in earlier,” Zell says, adding that the strategy also addresses the possibility that properties could be sold soon after they're completed. “If we are involved in the development process, there's a chance we would be inherited by the investor who buys the just-finished properties.”
CB Richard Ellis Inc. is yet another firm that shies away from ownership, preferring to focus on retail services, Caruso says. “We have been asked by a few clients to co-invest, but we think that our role is in construction and development services where we are paid a fee for them,” he notes.
Today, the firm manages a 60 million square-foot retail portfolio, but Caruso doesn't rule out the possibility of joint venture partnerships.
“It's not a corporate initiative right now but, I can certainly see a day where it makes sense for us to co-invest, particularly if our clients want it,” he admits.
Going the Extra Mile
Managers strive to meet increasing client demands.
The job of third-party retail managers is getting more complicated as private investors, foreign companies and institutions search for and buy more retail real estate than ever before. These buyers are looking to third-party managers to provide asset management services such as acquisition sourcing, financial reporting and investment.
“We've seen the requirements of a manager change over the years as the types of clients have changed and evolved,” says Matthew Harding, president of Levin Management Corp., referring to the fact that non-REIT entities accounted for 65 percent of all retail acquisitions in 2005, according to Real Capital Analytics Inc.
Specifically, reporting requirements have intensified substantially with owners requiring greater detail and deeper market information. To that end, Levin Management uses five different accounting software packages so it can provide the financial reports in the formats its clients want, Harding says. By going the extra step, the firm has grown its management business by roughly 500,000 square feet in 12 months to 12 million square feet in 80 properties. Levin also formed a strategic alliance with Trammell Crow Co.'s East Coast Retail Investment team after several of its clients asked for help in selling off some of their retail properties.
“We thought about establishing an in-house investment sales team, but it's an entirely different business from leasing and management,” Harding says. “This alliance is the last piece of the puzzle to complete our service offerings. Through it we can help our clients with all decisions related to their portfolios.”
Similarly, Zell Commercial has started offering its clients fee-based due diligence services, according to its president, Alan Zell. “Some clients with skinny shops look to us to help them do a substantial part of leg work for acquisitions,” he says. “We're willing to do that so we can get the management contract.”
Dallas-based Prizm Partners does much the same thing for its clients — and for the same reasons, says J. Scott Weaver, Prizm's CEO. He notes that clients rely on the firm to “get to know” the assets as part of the due diligence process and then feel comfortable turning over the management responsibilities if their clients end up buying the properties.”