Escalating retail property values and falling cap rates have put pressure on owners and developers to make money on operations, which in turn is pressuring third-party property managers to squeeze every dime out of centers they oversee.

In some cases, owners are demanding third-party managers that have already made cuts to go back and trim the fat again. If not, they are threatening to take over management of properties themselves, says Gregory Maloney, president and CEO of Jones Lang LaSalle Retail Group. “We work at or below market now, but we won't work without making a profit, because we're a public company and obligated to the interests of shareholders,” says Maloney.

David Pogue, senior managing director of Asset Services for CB Richard Ellis (CBRE) says that has put pressure on third-party managers to demonstrate their worth to their clients or else risk losing the contract.

“Managers can no longer just manage, collect rents and keep the center clean,” Pogue says. “They have to be an active partner that drives sales and an active participant in the life of the centers.” For its part, CBRE has looked to adding kiosks, offering corporate sponsorship and hosting events such as auto shows to create extra revenue.

Innovative third-party retail management companies realize the challenges and have introduced new services to capture business and expand their property management portfolio to include merchandising, brokerage and construction management services.

“One thing that separates great property managers is strategic thinkers who can look at a center, see its potential and what needs to happen to make it successful,” Pogue says. CBRE, with a portfolio of about 74 million square feet has an established team of experts who travel across the country to assess centers and provide “best practices” training for property management.

Additionally, the company's Retail Development Group tries to foster loyalty among developers by pairing them with retail properties and investors. “Like eHarmony, we're marrying developers with projects and financial partners that are a good fit with developer DNA profiles,” says California-based Scott Kaplan, senior managing director for CBRE's Retail Property Services.

In addition to trying to offer owners more services, property managers are putting their money where their mouth is by becoming equity partners with developers — a trend that began last year. For example, Houston-based PM Realty Group and Jones Lang LaSalle are willing to offer equity capital of up to 50 percent to retain the construction management, leasing and property management contract; although neither has had to pony up that much cash yet to get a deal. For Jones Lang's part, Maloney sees the tactic as a way of demonstrating to clients the company's commitment to an assignment.

Complicating matters

The emergence of mixed-use projects has made the situation even trickier for third-party managers that specialize in retail, though it's created more opportunities for firms that are capable of managing across product types.

Jones Lang LaSalle and CBRE are two firms catering to the emerging hybrid. According to Kaplan, projects comprised of two or more components now account for 55 percent of CBRE's 260 million square feet of retail space under development.

New Jersey-based Levin Management Corp., with a portfolio of nearly 13 million square feet, is also focused on managing mixed-use and lifestyle retail projects.

In today's environment third-party managers must stay abreast of the latest retail trends and be willing to invest in centers to keep them from becoming dated, says David Silver, the company's director of marketing. And to be successful in lifestyle, property managers must have the ability to attract tenants that are unique or new to the market.

Levin Management is currently working with New Jersey-based developer the Gale Co. to reposition Princeton's Forrestal Village, a 700,000-square-foot outlet center built in the late 1980s as a lifestyle center. The new center will be anchored by a 60,000-square-foot luxury health club and pool complex. The center's incoming tenants will also include some as yet named unique local upscale retailers and some new to the market, such as Salt Creek Grill of California.

Demographically, Silver says nontraditional anchors can be just as effective as traditional anchors in generating foot traffic. He claimed the Forrestal Village health club draw will be comparable to a supermarket, with 62 percent of its clientele being women who will visit an average of 1.8 times per week, compared with 65 percent of females who visit a grocery store 2.2 times a week.

While some property managers continue to focus on their core business, they have expanded the scope of services offered to add revenue to the bottom line. Atlanta-based Colliers Spectrum Cauble Realty, a regional Colliers International partner with a management portfolio of nearly 4.5 million square feet of GLA focused on grocery-anchored strip and large regional power centers, is generating new business with a full complement of services, including property and construction management, accounting, leasing and maintenance.

Jonathan Barry, president and founder, notes that his company was launched in the early 1990s by foreclosing institutions that needed properties renovated, leased and sold. It then took the next step of managing the properties for the buyers. Now, Colliers Spectrum Cauble Realty is experiencing another growth spurt with the rising number of new developers entering the Atlanta market. The market's growth has created a tremendous opportunity for third-party managers, because the majority of these developers are not equipped internally to market new projects.

Florida-based Bruce Strumpt, Inc., a regional firm focused on neighborhood grocery-anchored and strip centers, continues to focus on helping clients expand their portfolios by locating real estate opportunities in growing markets throughout central and south Florida.

Lenore Reynolds, vice president of leasing for Bruce Strumpt, says there is still a lot of undeveloped land available in Florida, but the rents have escalated 30 percent to 40 percent in the past few years, pricing local merchants and deep-discount national retailers, like Dollar Tree, Big Lots and Tractor Supply, out of the market.

She says new retail space is selling at a 6 percent cap rate, with rents ranging from the $25 to $30 per square foot in the Tampa Bay area and $40 per square foot on Florida's eastern shore.

And, tenant expectations have risen right along with rents, she explains. Tenants in newer projects have greater demands than those in older centers, who often complain about minor issues, making the property manager's job more challenging, says Brad Quine, president of Quine & Associates Co.

The Texas-based firm manages grocery-anchored neighborhood and strip centers in Texas, Oklahoma and New Mexico. At the same time, Quine says, owners can expect to pay less for management services at newer centers, since they shouldn't require as much maintenance as older ones.

Going forward, major changes in the retail landscape expected to impact third-party managers involve consolidation and privatization of public companies.

The consolidation of retailers will require more financial transparency as institutional owners express interest. Right now, a wave of privatization is hitting the REIT industry. The proposed $20 billion buyout of Equity Office Properties Trust by the Blackstone Group in November 2006 was the latest in a string of proposed and completed private equity deals over the last few years, but certainly not the last due to the need for private equity funds awash with cash to invest.

Maloney predicts this trend will continue for the next 6 to 18 months, creating new opportunities for third-party property managers with the expertise and capacity to take them on.

Silver suggests property managers must be ready. Both Levin Management and PM Realty Group are ramping up, investing a significant amount of resources to training its accountants to become proficient with the numerous accounting software applications used by retail owners.

“We go through the proper procedures to eliminate potential risks for owners in regard to compliance with codes and regulations,” says Doug Little, PM Realty Group executive vice president of operations and managing director of its central division. “We do it the right way to ensure owners can stand up to an audit.”