The sagging economy has served up a bounty for brokerage houses catering to the retail sector.
Firms that specialize in outsourcing real estate management and operations, like CB Richard Ellis, Jones Lang LaSalle, Staubach Retail and other firms are seeing a spike in large national retailers looking to farm out their real estate operations, including market analysis, lease administration, facility maintenance, and overseeing site selection and construction.
In just the last three or four months, Billy Zebe, managing director with the Retail Outsourcing Services division within Chicago-based Jones Lang LaSalle says they now receive an average of one inquiry a week from retailers, whereas it had been one every three months before the slowdown. Without disclosing revenue projections, Zebe projects Jones Lang LaSalle's retail business will double over the next year.
“I just think retailers are seeing it as a way to save money,” Zebe says. “We all know they are having a tough time making their financial goals. It has been pretty amazing all the inquiries we have been getting.”
Meanwhile, Naveen Jaggi, senior managing director of occupier services at Los Angeles-based CB Richard Ellis, says the firm has experienced a four-fold increase in the calls about outsourcing over the past year. Rather than trim costs by making cuts in core business areas, like customer service, retailers are evaluating their back-office operations, including real estate.
Both firms made moves in the past 18 months that are enabling them to capitalize on this growing business. Dallas-based Trammell Crow Co. was among the first real estate brokerage firms to offer outsourcing services for retail real estate. When CB Richard Ellis acquired Trammell Crow in December 2006, it brought the capability in-house and inherited some of Trammell Crow's clients. Jones Lang LaSalle's promoting its outsourcing capabilities, resulted from its acquisition of the Standard Group in January. Meanwhile, Staubach Co. now has 450 professionals in 22 U.S. offices in its retail practice. The company also works with an extensive network of brokers throughout the country, says Steve Dawkins, president of corporate solutions.
Inquiries are coming from existing clients who want to expand their outsourcing and prospective clients, including one national soft goods and clothing retailer. In addition, Jones Lang LaSalle already handles transactional and construction management for T-Mobile and transactional management for Java Juice. The latter is also considering expanding its outsourcing, says Zebe.
Jones Lang LaSalle offered outsourcing to retailers for their real estate portfolios before its acquisition of the Standard Group. However, with the acquisition, it took their complement of services and brought it to a new level. Its retail outsourcing service division includes: concept analysis, market planning, site selection, acquisition, project management, lease administration and facilities management. As a result of the Standard Group's market expertise, Jones Lang LaSalle envisions the division being among its fastest growing business units.
“When a retailer comes to us and says, ‘We want to open up 100 stores throughout the U.S.,’ first we identify or redefine who their customers are,” Zebe says. Using market research, they look at demographics that best match the client's needs. “We don't just put them in the first shopping center that has something available.”
Then they move on to developing site and store criteria, a growth strategy for the retailer, market planning and competition analysis, Zebe says. A retailer can save 10 percent to 20 percent on construction management.
A team is built around the client's concept to bring it to fruition. With the various pieces of the project in hand and depending on the client's needs, team members locate appropriate sites, arrange to buy or lease properties and, in some cases, manage construction, Zebe says.
Depending on the project and the location, the process can take from three to six months to two or three years, Zebe says. Much of that depends on local permit and zoning requirements, and Jones Lang LaSalle's familiarity with various markets helps expedite the process. “Our whole concept is speed to market,” he says.
Recently, CB Richard Ellis inked a two-year contract with AT&T Mobility to assist in its efforts to locate sites and build new stores, Jaggi says. Last year, it signed Liz Claiborne to a similar deal. In the case of AT&T, CB Richard Ellis assumed oversight of its real estate operations to assist it in meeting its goal of opening new stores more rapidly.
CB Richard Ellis has “an ocean of people” already familiar with markets throughout the country and the know-how to expedite transactions, Jaggi says. That can be especially helpful, for example, when a retailer plans a high-velocity store roll-out — say, 200 locations in a year.
“Depending on what the client wants, we can do the entire cradle-to-grave process for the retailer,” Jaggi says. “They don't need to have an internal real estate office.”
And it's not just about speed. Jaggi estimates retailers can save 20 percent on fixed expenses through outsourcing. (That's before calculating fees paid to the broker.) One of the biggest savings for retailers is the outsourcing of facilities maintenance, which can save as much as 30 percent.
Dawkins says that while outsourcing real estate functions might reduce costs for retailers, the biggest benefit is the flexibility it provides, including managing staff size.
Another key component is real estate administration, according to Dawkins, whose firm manages about 18,000 leases,” Dawkins says. “We typically return $1.81 in savings for each dollar a client spends.”
Among the portfolio actions the company handles are renewing and restructuring leases and renegotiating terms and conditions, Dawkins says.
Business sense
Some retailers may be cautious about outsourcing because they don't want to cede control over any part of their operations. And, Jaggi adds. “The real estate industry wasn't structured to do large retail outsourcing during the last recession in 2001. This is a fairly new approach for them.”
Outsourcing of real estate functions has historically been more prevalent in other types of commercial property, such as in industrial or office space. But for retail, location and operation of real estate are more critical than, say, for a law firm. In other words, for retailers, it's hard to discern where the retailers' core competency ends and real estate management begins.
Slowly, retailers are coming to the view that they aren't real estate specialists and that its serves them well to bring in a full-service firm to help manage that area. “We are changing the old guard,” Zebe says. “We are convincing them that we [think like] retailers and understand their operations — that for us it's not just about opening a store, but doing the modeling and making it perform.”
Although brokerage firms don't have a corner on the market when it comes to site selection expertise and analytics, when working on an expansion they can provide industry and specific market analysis where retailers may not have much information. In some cases, retailers are relying on static Excel spreadsheets to evaluate markets, Zebe says. Large brokerage houses have extensive networks of data on regional and local markets.
For a retailer, if 10 percent to 20 percent of its stores are under-performing, this should raise red flags. Typically, retailers take this as a cue to downsize. However, Zebe says, when business returns you must be ready to resume an expansion mode. Zebe realized the value of outsourcing when he worked in retail as senior vice president of store development at Wilsonville, Ore.-based Hollywood Video. Earlier this decade, when it was opening one new store per day it abruptly had to stop after defaulting on a bank loan.
In charge of the movie rental company's real estate department, Zebe had to suddenly jettison 35 positions from his department. When the financing returned, he had to just as quickly ramp up the expansion. The Hollywood Video experience, Zebe says, taught him it is much easier to outsource operations instead of rehiring staff.
John Restrepo, owner of Las Vegas-based retail consulting firm Restrepo Consulting, sees the trend to outsource gaining momentum. Retailers outsourcing real estate functions is the next step within an industry that already subcontracts work to engineers and to construction and consulting firms.
Beyond the monetary savings, outsourcing's advantages, according to Restrepo, include improved decision-making for retail executives based on data and analysis from an objective and independent resource.
In its 2006 survey on outsourcing, the Applied Research Center reported outsourcing is expected to increase across commercial real estate functions and that “while cost savings was an early driver, factors other than costs drive outsourcing decisions.” The survey adds that those functions outsourced were areas where cost was most important.
Corporate Real Estate Outsourcing: 10 Years Later, by Ernst & Young, Columbia University and CoreNet Global, a real estate professional association, reported in 2002 that 60 percent of companies outsourced and retailers accounted for just 10 percent.
The overwhelming majority, 76 percent surveyed who outsourced, said they did so for costs and 60 percent said improving service was a factor in their decision.