Retailers evaluating total occupancy costs are paying more attention to common area maintenance (CAM) charges, which include most of the exterior services performed at properties: sweeping, garbage removal, landscaping, parking lot lighting and irrigation.
Keeping CAM charges low helps retail properties retain existing tenants and attract new ones, so many property managers have focused on reducing those costs.
“Tenants are comparing CAM charges with as much intensity as rents—they can be a significant increase over your net rent,” says Rose Evans, vice president of property management with Levin Management Corp., a North Plainfield, N.J.-based firm with a 12.5-million-square-foot management portfolio.
The challenge is that while driving down costs, it’s important not to sacrifice the look and feel of a center with a lower level of maintenance. With the right approach, overall CAM costs can often be reduced by anywhere from 10 to 25 percent, without sacrificing in those areas, says Karen Raquet, director of property management for the mall division with Jones Lang LaSalle Retail, an Atlanta-based property manager with a 92.3-million-square-foot portfolio.
The process should start with evaluating each property’s annual budget, according to John Sebring, director of property management with the Shopping Center Group, an Atlanta-based real estate services firm with an 8-million-square-foot management portfolio. Often, managers rush the process without paying attention to each line item, he notes. Looking carefully can shed light on areas where expenses could be reduced.
When Jones Lang LaSalle assumes management of a center, the firm goes through a checklist for all CAM charges to ensure cost efficiency. In many cases savings can be realized through minor changes—like purchasing less expensive bathroom supplies or substituting a night security guard with an alarm system, according to Raquet.
This year, for example, the Shopping Center Group has been looking at how much its tenants pay for fire phone lines, a necessary safety expense that allows sprinkler systems to automatically alert fire departments when something goes wrong. Fire phone lines are included in tenants’ CAM charges. However, after evaluating fire phone charges for 2010, executives with the Shopping Center Group determined that it would make sense to bring in a different phone carrier or switch to cellular service to bring down the costs at some centers. These are the kinds of less obvious CAM expenses that can often benefit from a second look, Sebring says.
It might also make sense to reduce the number of days a center gets swept, according to Evans. Power centers, for example, see the heaviest foot traffic during weekends and don’t get a lot of visitors during the beginnings of weeks. So that means managers can skip cleanings on Mondays without visibly affecting properties. (Grocery-anchored shopping centers and centers heavily populated by restaurants, on the other hand, get steady customer traffic seven days a week and tend to create more litter, so skipping cleaning days is a bad idea, Evans notes).
Bargaining positions
Another way to control CAM costs is by taking a hard line with services providers. Before the recession, vendors of cleaning, landscaping and other maintenance services would often push for two percent or three percent increases in costs every time they renegotiated their contracts.
Today, those service providers have lost clients due to the recession, and are more open to offering discounts and working out creative deals. Although there are instances when a multi-year contract can help the property manager secure a favorable rate for a given service, most of the time it’s important to bid on contracts on an annual basis to take advantage of this favorable environment, says Raquet.
When it comes to landscaping, for example, “We’ll bid it out with up to five or six vendors and to be on the bid list for us, there is a certain quality of service they have to be able to provide,” notes Kay A Nelson, principal and vice president of Mid-America Asset Management Inc., an Oakbrook Terrace, Ill.-based firm with a 29.5-million-square-foot management portfolio. “Their pricing has become very aggressive.”
To further strengthen its bargaining power, Mid-America employs a tenant services coordinator who researches market prices for various services and renegotiates contracts with vendors on an annual basis. In 2010, for example, Mid-America saved 17 percent on landscaping services compared to the year prior.
Deal time
In addition to negotiating lower prices on services, property managers have been trying to get more creative with their contracts. Levin, for example, recently signed a deal with an electrical company that will provide nightly inspections of parking lot lights for a center it manages in Long Island. The firm agreed to a longer than standard contract term—three years—but in exchange, it asked the vendor to provide new lamps for the center.
“We got brand new lighting and it benefits them because they will be doing less maintenance,” says Evans. “These are the types of deals we look for to see how we can benefit our tenants and control our CAM dollars.”
Mid-America, meanwhile, has been working on a new strategy for snow removal at its centers in the Midwest. Normally, a property owner pays a gradually increasing fee for every two inches of snow. Executives at Mid-America decided that for properties in heavy snowfall areas, it made sense to negotiate a flat annual rate instead. For example, at its Regency Plaza center in Palatine, Ill., snow removal in the winter of 2009 cost more than $100,000. Last winter, with the new rate, snow removal costs were $40,000 less.
“It was a huge saving because we had 22 inches of snow in a two-day period and weren’t charged for all of those services because of the flat rate,” Nelson says.
Smart managers also invest in new products, like energy efficient lighting systems, to help drive down utility costs. Levin recently replaced 1,000-watt light bulbs with 750-watt light bulbs at its Crossroads Place center in Falls Church, Va. and at Capitol Plaza in Ewing, N.J. The lower energy consumption, combined with less need for light bulb replacement over the next few years, has resulted in savings of at least 30 percent, Evans says.
Meanwhile, the Shopping Center Group is using a zone control product that shuts off parking lot and canopy lights during the night, when there are no customers at the property. (The Shopping Center Group keeps it security lights on throughout the night to help promote a safe environment, Sebring is careful to point out.)
For its part, Mid-America has been installing rain gauges on the sprinkler systems at some centers. The gauges conserve water by shutting the irrigation system off on rainy days. “It’s a very inexpensive retrograde, but it saves a lot of money on irrigation costs,” according to Nelson.
Investing in energy- and water-efficient systems makes all the more sense because they often make the property eligible for state and federal rebates. After Jones Lang LaSalle retrofitted the parking lot lights at its Rosedale Center in Roseville, Minn., for example, a rebate helped it recoup investment costs within 19 months, according to Raquet.