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ABRACADABRA: Maximize Your Operations Budget

Shoppers are a demanding bunch.

They expect top-rung stores and a choice between pizza and pan-fried dumplings for lunch, but their list of wants goes far beyond that. They want good air conditioning on a sweltering day. Security that shields them from wannabe hoodlums. A parking lot free of broken glass. And, whether they realize it or not, effective marketing that encourages them to spend money.

Center managers know all this. They also know how expensive it is these days to provide such services. In the battle to simultaneously control costs and improve properties, getting the most from an operations budget has become an art — all the more so because of the pressure on every center to be the best performer it can be in a market where greenfield growth is limited.

“The best way to retain tenants is to make sure the property managers have the depth of expertise to maximize the property,” says Susan McGuire, senior vice president-operations for the retail division of Crosland Inc., a Charlotte-based developer that operates nearly three-dozen neighborhood centers in the Southeast.

“It used to be enough to make sure the pansies were planted and the shopping lot swept,” McGuire says. “Now we want managers to have the knowledge to grow net operating income and increase the income side through renewals.”

Turning Performance Up A Notch

More renewals, of course, mean a fatter bottom line — crucial these days when “more and more of the largest commercial real estate is held by public companies driven by returns and profitability,” says John Moss, senior vice president of retail management for Colonial Properties Trust of Birmingham, Ala., which operates 46 retail properties in the Southeast ranging from malls to big-box centers. Still, he adds, “You can only drive down expenses so far. Operations is only one leg of the stool. The leasing and the revenue-generating side of the equation are paramount.”

So how are managers working to achieve peak performance at the best price? Let us count the ways.

To reduce utility costs, they're hiring consultants, outsourcing their energy-management programs and installing state-of-the-art equipment that runs HVAC systems at optimum efficiency.

To get maintenance costs under control, managers are bundling contracts so that one vendor handles the work at multiple properties, in the process achieving greater economies of scale.

To reduce expenses in such disparate areas as telephones and trash, they're becoming aggressive comparison shoppers who play one supplier against another, much like homeowners might pressure Verizon to beat Sprint's best offer.

In short, they scrutinize every check they write. They also examine which services can be improved to have the maximum effect on tenant retention, including marketing and customer service.

“You analyze where everything is coming from and what's driving every line item,” says Moss. “You've got to break down all the components on your financial statement and ask yourself, ‘What is this costing me, and what am I getting for it?’ You have to get into the details.”

And then get creative. At one property that uses a chilled water system for cooling, Colonial was determined to do something about the rising cost of municipal water. “Water used to be a cheap commodity in the past, but it has become much more costly,” notes Moss. The solution came when a disused well was found on the property. Soon it supplied water for the chiller tower.

When it comes to vendors, it's important to audit contracts with an eye toward the scope of their responsibility — a first step in eliminating duplication. At another property, Colonial managers discovered that the task of keeping the sidewalks clean was held not only by the janitorial service, but by the parking lot maintenance vendor and the landscapers.

And although good relationships with vendors are important, Moss believes it's important to re-bid contracts every year in an effort to find even better deals. He says that's particularly true with telephone services, “which right now are very competitive,” and trash haulers, “which have become aggressive as well. A lot of people lease their pads to the trash companies and turn them over to them, which gets you out of the trash business,” he says.

Farming Out

These days, outsourcing is not just common but necessary, especially in areas that are fast changing such as utilities, where a lack of knowledge can cost big money. To sort through the shifting competitive situations and confusing rate structures, many owners are turning to consultants and outside vendors for help.

“We're not savvy enough to necessarily know how to negotiate with utilities on the best usage plans,” says Crosland's McGuire, who has hired third-party consultant NUS Consulting Group to analyze expenses and make recommendations. Other owners, such as mall giant Simon Property Group, have outsourced their entire energy procurement management program.

“Our studies have shown that in many companies utilities are the third-largest expense, but usually the least audited,” says Dave Brown, vice president of operations for NUS, based in Park Ridge, N.J. “Retail is a big part of our industry, since it's very sensitive to utility costs. That is especially true of HVAC costs.”

NUS starts by entering all of a company's utilities data — electric, gas, telephone and whatever else it may use — into a database, where it is studied against available rates. The analysis may not produce any savings (“There are no guarantees it will,” Brown says) or it may produce savings of 30 percent or more.

“With deregulation, many companies made the mistaken assumption that just by entering the deregulated market they would save money,” he says. “We've found many cases were people actually lost money. You have to understand your requirements, and no two properties are alike.”

The most common outsourcing areas are maintenance and cleaning, and the trend toward vendors shows no signs of abating. “The concept of outsourcing is being more and more accepted,” says John Rogers, director of business development for Unicco Service Co. With 19,000 employees, Unicco is one of the country's largest facilities management contractors, counting Simon, General Growth Properties and Pyramid Cos. among its biggest retail clients.

Much of the Massachusetts company's growth has come from large retail properties. Unicco cleans and maintains 81 regional malls around the country, but lately it's getting more business from smaller owners. These “self-operators” have realized that facilities management isn't their core competency, Rogers says.

There are plenty of reasons to outsource, and Rogers can tick them off easily. A vendor like Unicco stays abreast of the latest technology, like new scrubbers that can clean bathrooms in half the time, he says. It uses computerized maintenance management systems to track preventive maintenance and handheld PDAs that produce Web-based reports from property inspections. Because of its size, it gets preferred pricing with outside contractors. And outsourcing ends the need for the owner to handle wage and benefit issues for cleaning and maintenance personnel.

Serving The Customer

But keeping costs in line is only part of the retention battle. Another part — maybe the biggest — is drawing shoppers and encouraging them to buy. In fact, improved customer service is gaining currency among the largest mall owners as a way to tweak the performance of a property.

Last year, Westfield America began introducing an upgraded customer service program it calls Westfield Wow that offers an array of service improvements — from child care centers to help with heavy packages.

The company says the program marks a shift from drawing more visitors to encouraging more customer loyalty, as measured by longer visits and more spending.

Whether it's through outsourcing, better internal analysis or creative cost-avoidance, managers are certain to keep pushing for ways to stretch a buck and make their properties more attractive. That's especially true given the scarcity of new development opportunities.

“People are realizing that some of the best value you can create is in your existing portfolio,” says McGuire. “You've got to stay focused on that. You got to improve NOI and add value for your owners.”

Crosland's Group Hugs

Looking for a cost-effective way to keep more tenants? Give them the corporate equivalent of a big hug.

In an effort to raise retention rates, Crosland's property managers meet with every retailer once a year. “We call these ‘non-issue meetings,’” says Susan McGuire, the retail division's senior vice president, operations. “They just sit down with them and talk about their business and what we can do to be better managers for them, and maybe talk to them about their future expansion needs.”

By showing tenants a high level of interest, managers build a solid relationship with tenants that allows them to better deal with any issues that arise. They also position themselves to take advantage of the retailers' further growth.

It's simple but effective. McGuire says third-party surveys of Crosland tenants found that satisfaction scores rose 15 points after the inception of the program several years ago.

“We're quite pleased,” she says. “We think it's going to manifest itself in more renewals and better opportunities.”

Talk is indeed cheap — in the best possible sense.

Cafaro Channels Energy

Think of the ways utility bills can be run up at big malls — all the lights left on after closing, all the thermostats turned too low because one person thought it was stuffy.

It doesn't work that way at the 16 malls and 35 strip centers of the Cafaro Co. From a computer at its headquarters in Youngstown, Ohio, the company controls energy consumption at all of its properties — from lighting to HVAC to the temperature of the hot-water tank.

Energy-management systems have been widely embraced by center operators in recent years. But Cafaro was an early adopter, and it remains enthusiastic about their benefits. In the past 20 years “we've spent considerable time, energy and effort on a variety of computer-related controls,” says John Richley, Cafaro's director of operations. “It removes the human element from turning lights and heat on and off. People sense temperature on a personal basis, not on a climatic basis.”

The technology's introduction some 20 years ago brought big changes. Richley recalls that in the early 1980s, when Cafaro's Sandusky Mall in Ohio installed a $100,000 system to control power usage, electric bills dropped from about $25,000 a month to between $7,000 and $8,000.

Savings like that aren't as common these days, but the new generation of energy-management systems can still trim utility costs by 10 or 12 percent, Richley says. At the same time, the cost of the systems has dropped. Equipment far more advanced than that used in Sandusky can now be bought for a fifth of the cost, he says.

Cafaro is so committed to the process that at four or five properties it's already replaced systems installed 15 or 20 years earlier. All of it is under central control. “If we need the parking lot lights on for an extended time at Connersville Plaza, we can press a button in Youngstown and the lights will stay on at Connersville, Ind.,” Richley says.

The best measure of the effort success is financial. “Our electric and utility expenses have probably remained flat for the last seven or eight years,” notes Richley, “and that's a pretty fair achievement.”

Hitting Paydirt

The solution to high utility costs may be right under your feet.

To cut heating and cooling bills, a growing number of commercial developers are taking advantage of a simple fact of earth science: Just a few feet below ground, the temperature is nearly constant year-round — usually about the same as the area's annual average air temperature. In the mid-Atlantic, for instance, the temperature a dozen feet below is around 50 degrees whether it's July or January.

Here's how that bit of arcana can save money. When coupled with technology called a heat pump, water circulated through buried pipes can bring coolness into a building in the summer and warmth into it in the winter. In the process, energy bills are slashed; in some case studies, by more than half.

These “geothermal systems” are quickly catching on as a way to conserve energy. Geothermal systems have been installed in an estimated half million U.S. houses and in a growing number of commercial and institutional settings.

Big retail projects have been slow to adopt the technology, but that's changing. DestiNY USA, the $2.2 billion development slated to open in 2006 in Syracuse, N.Y., will make use of geothermal energy.

Smaller retail projects have used it for years. One company, Furniture & Things, a large furniture retailer in Elk River, Minn., installed geothermal eight years ago, and cut its heating and cooling bills by an estimated 28 percent.

At Econar Energy Systems, a leading geothermal manufacturer based in Minnesota, sales manager Scott Jones says there is growing interest from commercial developers, including retailers. “There is great promise here,” he says.

The High Cost of Garbage

No getting around it: Trash hauling is as expensive as it is necessary. It's especially costly if your compactors are being pulled before they're fully filled, as is often the case when pickups are done on a fixed schedule.

In the age of the microprocessor, though, that doesn't have to happen. One company, One Plus Corp. of Northbrook, Ill., has found a niche with a device that monitors the fullness of compactors and automatically signals the hauler when the load is ready to be pulled.

By preventing partial loads, One Plus's Compactor Fullness Monitor System can drastically reduce hauling costs — often by as much as half, says Vice President Jay Simon. And because the hauler is alerted just before the compactor is fully stuffed, the problem of overflow is also prevented.

Based on average savings, the device can pay for itself in just a few months, the company says. Some models even have the ability to keep track of who's using the compactor — valuable in multi-tenant properties.

The system has found favor with industrial concerns like General Motors and other companies that generate huge volumes of waste, including supermarkets. Simon maintains that it holds “tremendous potential” for mall and shopping center owners, and notes that Simon Property Group is among One Plus's customers.

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