Faced with falling property incomes, owners of retail real estate look for creative ways to slash spending.
As Chicago-based Urban Retail Properties gets ready for this year’s RECon convention in Las Vegas, the firm is trying to cut expenses in ways big and small. Instead of the more than 30 employees that attended the event last year, Urban will send about two dozen staffers to the conference in 2009. Food services at the Urban Retail booth, which normally include coffee and snacks, will be cut. And the traditional Monday night reception for the firm’s friends and clients? That won’t be taking place this year.
Being an exhibitor at the convention is “very, very costly,” says Ross B. Glickman, chairman and CEO of Urban Retail Properties, a developer and property manager responsible for more than 21 million square feet of space. “We represent our clients and we have to be there, but we are doing things in a way that is productive for us.”
The changes reflect the company’s attempts to reduce travel and entertainment expenses as part of a broader cost-cutting effort. And Urban is far from alone on this. Many companies in the industry are pushing to lower operating costs at a time when net operating incomes are falling.
Retail real estate firms are looking to save funds any way they can. At the corporate level, cost-saving measures have included layoffs, salary freezes and much tighter travel and entertainment budgets, as well as smaller steps such as double-sided photocopying. On the property level, owners have been renegotiating existing contracts with their service providers, taking advantage of energy-efficient technologies to bring down utilities costs and postponing small landscaping and renovation jobs. A number of mall owners have reduced operating hours at their centers and some have been looking at the extent of the services they provide. A few firms, for example, have eliminated one day from their parking lot sweeping schedules and cut the working hours of their security staff. “The issue is it’s a fine balancing act,” says Glickman. “This is nothing to be taken lightly. You don’t want to compromise the quality of the center.”
The trend was already under way in 2008—last year, total operating expenses for superregional malls averaged $11.72 per square foot, 13.4 percent below the $13.54 per square foot spent in 2006, according to data from ICSC. Average operating expenses for regional malls went down 3.4 percent during the same period, to $9.85 per square foot from $10.19 per square foot. And at $4.38 per square foot, total operating expenses for community shopping centers were down 2.9 percent from the $4.51 per square foot owners spent three years ago.
Those cuts have coincided with drops in occupancies and flattening rents. Between the third and fourth quarters of 2008, the vacancy rates at neighborhood and power centers and regional malls shot up 50 basis points, according to Reis, Inc., a New York City–based research firm. The upward revisions, to 8.9 percent for neighborhood centers and 7.1 percent for malls, represented the largest increases since Reis started tracking quarterly statistics a decade ago. Meanwhile, rental incomes from existing tenants are not what they used to be. In some markets, requests for rent reductions are now coming in at the rate of 10 per day, says Bill Goeke, vice president and director of property management with Weingarten Realty Investors, a Houston, Texas–based REIT with a 42-million-square-foot shopping center portfolio.
Scott J. Fawcett, president of Newport Beach, Calif.–based Marinita Development Co., Inc., a privately held shopping center developer, estimates that his company’s income this year will be 10 percent to 20 percent below the figure achieved in 2007. “I don’t think any of the shopping centers are going to have nearly the profitability they had,” he says. In response, Weingarten Realty reported approximately $25.8 million in general and administrative expenses for 2008—4 percent below the $26.9 million the company spent in 2007. Pennsylvania-based PREIT, which owns more than 27 million square feet of space, including both shopping centers and regional malls, reported its general and administrative expenses for 2008 declined 2.6 percent compared to 2007, to $40.3 million from $41.1 million. Santa Monica, Calif.–based Macerich Co., which operates a 76-million-square-foot regional mall portfolio, registered a 0.6 percent decrease in its general expenses last year, from $16.6 million to $16.5 million.
Not helping matters—at least for the publicly traded firms in the sector—is the fact that market capitalizations have plummeted as part of a broader stock sell-off. Retail REIT stock prices are down nearly 80 percent from peaks reached in February 2007. That’s created debt issues for most companies that previously seemed to be conservatively levered.
Dropping stock prices have eroded debt-to-capitalization ratios. Moreover, it’s become increasingly difficult for firms to refinance existing lines of credit. And the longer the credit crisis drags on, the more firms are coming up against deadlines to pay down or refinance debt. That creates a powerful incentive to build up cash reserves as firms either look to retire facilities or else pony up more equity as part of arranging new lines of credit.
Some REITs have also opted to cut or suspend dividends. And Simon Property Group has taken advantage of an IRS rule that allows REITs to pay out dividends in the form of stock in 2009. By doing this, Simon says it can bolster its cash reserves by up to $900 million. So far, other REITs have declined to follow Simon’s lead. But analysts think that could change.
Layoffs have been by far the most publicized cost-cutting measure recently. In February, Macerich eliminated 142 positions. In March, Forest City Enterprises, a Cleveland-based firm with a 12.8-millionsquare-foot retail portfolio, let go 100 of its employees, after already downsizing 160 jobs in November. Over the last 14 months, Weingarten Realty Investors reduced its staff by up to 20 percent, estimates Goeke. A disproportionate number of those jobs came from the company’s development department, though some administrative positions have been eliminated as well.
“Anyone who was a developer, we are seeing a lot of cuts there,” says Joel Bloomer, a REIT analyst with Morningstar, a Chicago-based investment research firm, who predicts the retail real estate industry will continue to see major layoffs. “As occupancy falls and rents fall, there will be more pressure; it’s the nature of a fixed-cost business. I think it’s going to be a steady process of reducing overhead over the next few years.”
Other cost-saving initiatives are being instituted behind the scenes. At Urban, which has experienced its share of layoffs recently, the remaining employees are facing a salary freeze. At Forest City, nonessential job vacancies at the property level are not being filled, says Tom Gilkeson, vice president of operations with the firm. “We still have our basic general manager and marketing director, but sometimes, we maybe haven’t replaced the assistant manager/trainee positions,” he notes.
The place where the level of cost-cutting in the industry may become the most apparent is at RECon. Companies are taking major steps to reduce their presence at the show. Expect scaled-down booths, fewer parties and less staff on hand. Rumors persist that two major regional mall operators won’t even be exhibiting at the Las Vegas Convention Center this year, instead opting to keep personnel at hotel suites away from the convention site.
Firms say that they are getting less meeting requests from retailers. There are fewer new developments to showcase at the convention. All that will lead to a drop in attendance this year. And many people are trying to focus their meetings on Monday and Tuesday to shorten their stays in Las Vegas. ICSC will be cutting the exhibit space down from the three halls the show has occupied the past two years (North, Central and South) down to the two halls it previously inhabited. The Leasing Mall will also close at 1 p.m. on Wednesday, May 20 rather than remaining open until 5 p.m., as it has the past few years.
For its part, PREIT, which traditionally holds a lavish party attended by hundreds of people during the ICSC Las Vegas convention, canceled the affair this year and asked its corporate staff to reduce all travel and entertainment expenses by 10 percent in 2009, according to Joseph F. Coradino, president of PREIT Services, LLC. Robert B. Aikens & Associates, LLC, a Birmingham, Mich.–based real estate developer with 730,877 square feet of shopping center space, saved up to $15,000 in recent months by cutting back on entertainment events and lunches with retailers. When it comes time for the ICSC convention, Aikens’ representatives will stay in Las Vegas for three days instead of the traditional five, says Jeffrey P. Thompson, the firm’s president.
Property owners and managers have also been taking a closer look at individual centers within their portfolios to determine where they can reduce expenses without negatively impacting the center’s image. About six months ago, PREIT executives started a conversation with the general managers at the firm’s properties about controlling costs. “We are in an economic environment where people have to be resourceful,” says Coradino. “We are asking our people to do more with less.”
There is some potential for savings in utilities management, especially for companies that have been implementing green technologies, notes Urban’s Glickman. Urban recently signed a contract with Borealis, a Chicago-based firm that develops energy-efficient, long-lasting lighting devices. Once Borealis installs the lamps throughout Urban’s properties, Urban will be able save on both energy consumption and lightbulb replacement, says Glickman.
Another way to cut electricity costs is by dimming the parking lot lights during nighttime, says Rose Evans, vice president of property management with Levin Management Corp., a Plainfield, N.J.–based firm responsible for 12.5 million square feet of retail space. If a center features light poles with multiple fixtures, Levin might consider turning several of those fixtures off at 2 a.m., when the parking lot is empty.
The property manager has also been looking at the utilities charges it pays for recently vacated spaces. While empty stores still need to be heated, they don’t need the same level of warmth as operating retail establishments at the same center, so Levin has been reducing gas and water use at such properties by up to 30 percent. “That’s significant savings if you look at heating all winter,” notes Evans.
And firms aren’t just looking at the property level. Aikens, for example, is postponing purchases of new office equipment, including computers, for its administrative staff. When combined with the cutbacks on travel and entertainment, the move will help the company save up to 10 percent of its annual budget this year, according to Thompson. Meanwhile, several firms, including Urban and Regency Centers, have been encouraging employees to take advantage of double-sided photocopying to manage paper costs.
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.”
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.