The war to control costs in successful centers

The Battle to Control Costs While Running Successful Centers

The Battle to Control Costs While Running Successful Centers, by Joe Gose

Today’s uncertain economic environment is prompting many shopping center owners and property managers to reduce expenses and operate more efficiently, from challenging their tax bills to leveraging proptech to fine-tune the use of daily resources. “We’re constantly looking for opportunities to maximize savings, not only for our shopping center clients but ultimately for our retailers to help them succeed and profit,” said one senior director of retail property. “There is definitely a trickle-down effect.”

The defensive posture among shopping center landlords and property managers is nothing new. About this time every year, when budgets are being calculated, real estate companies emphasize the importance of being more judicious when allocating resources. But the urgency is more palpable heading into 2023, he said. “I hate that interest rates are going up and that inflation is going up, but the most creative real estate people are in retail, and we have tools that we can use to make a difference,” mentioned another manager.

Dissecting Contracts

Among those tools, some are common practices to all industries in tight times. For example, retail operators are reviewing contracts for security, landscaping, insurance, janitorial services and other vendors.

In some cases, services like parking lot sweepers have added fuel surcharges to compensate for the rise in gas prices over the last several months. Costs also have risen because vendors have to pay workers more to combat labor shortages. “Increasing vendor costs of 5%, 10% or more a year need to be justified, fair and reasonable,” one manager explained. Everyone is facing higher prices, so trying to be meticulous in reviewing proposed increases for the upcoming year is important to know things like the percentage of an overage that is going into the hourly rate for employees.

The shopping center owners that can leverage large portfolios to drive economies of scale typically benefit most from such negotiations, she said. But even some of the biggest recognize the need to be flexible. By way of example, one major mall operator is looking for ways to manage expenses and identify new ancillary revenue streams. Recognizing where to scale operations and when to source locally has been an emphasis. Renegotiating service contracts, focusing on building utilities and revisiting best practices have yielded cost savings or, at a minimum, held certain key costs flat to tenants.

Information gleaned from cellphones, cameras and other devices are helping operators gauge how to use vendors more effectively. Knowledge of when and where customer counts are rising and falling helps shopping center operators tailor security, janitorial and other services to match the varying periods of use.

That’s a relatively new phenomenon for many retail center landlords, many of whom dragged their feet in adopting new technologies. Owners and managers may have had accounting and property management data available in the past, but it wasn’t user friendly. The good news is that the data is easier to use, so it’s easier to drive process improvements. That’s where the big wins are.

Tax and Utility Watch

Shopping center landlords and managers continue to employ appeals of tax bills observers say. Additionally, operators are hiring services that monitor and challenge utility bills. In deregulated energy markets like Florida, property owners have the opportunity to negotiate and lock in electricity rates for certain periods. Utilities are a place where you can really create some significant savings, but you want to negotiate during off-peak months. If you’re in Florida, that’s in January and February. It’s certainly not in August, when everyone’s air conditioning is blasting across the state.

Coincidentally, shopping center operators continue to push for more energy and water efficiency, especially in dry climates like California. Once again, customer traffic and other data guide some of those decisions, including when and how often to clean sidewalks. Marketplace operators also can deploy systems that monitor moisture in buildings to detect leaks and waterline breaks to avoid both needless costs and potential damage.

Ongoing HVAC upgrades and the installation of solar panels, LED lighting, power control systems and reflective, or “cool,” roofs will translate into savings. These initiatives not only support [environmental, social and governance] commitments, but they also hedge future cost increases to grid energy.

Capex Decisions

Many landlords will have difficulty finding the capital required to make such ambitious energy-efficiency enhancements in a worsening economy, especially if vacancy is rising. But shopping center owners recognize the importance of maintaining properties and making capital improvements where needed. The trick now is not to ensuring projects stay within budget while not passing burdensome assessments onto tenants. If consumers are going to consolidate their shopping trips from five a week to three or fewer, they aren’t going to go to a shopping center that looks like it’s falling apart. Smart landlords will still spend the money, and will just amortize those capital improvements over a longer period of time so that the impact on the tenant is less.

One landlord recommends that owners add more efficient lighting and other systems to their buildings and parking lots, which will generate savings to pay for themselves over time. But routine improvements like periodic parking lot slurry seal applications need to stay on schedule. Prior to the pandemic, it wasn’t unusual for tenants to repay some capital improvement costs in a year’s time, but it’s not smart to do that now. Tenants have to continue to thrive, especially those that have struggled coming out of the pandemic, so its important to do everything  to maintain occupancy. If you see vacancy, then you’re losing momentum.

Going on Offense

Responding to choppy market cycles isn’t solely about cutting costs or elongating the periods in which tenants pay for capital improvements. Some marketplace operators are adjusting advertising to maintain or curtail a drop-off in shopper traffic.

To help retailers drive top-line sales, some landlords are placing a greater emphasis on performance marketing — digital advertising that is paid for upon sales, leads or “clicks” — and promotional programs that fit the needs of its tenants. That approach includes tiered loyalty program and personalized retail offers.

Meanwhile, to target consumers feeling the pinch of inflation, some landlords are accentuating the value its tenants provide. That means highlighting price in a way that it may not have in the recent past to make sure that customers have a very clear vision that centers are places that they can go to combine shopping and entertainment for a great experience that’s also a great value  and deliver that message in zones that are very responsive to our marketing as opposed to trying to pick up different trade areas that may or may not respond.