Landlords Move Into Other Services
What’s a landlord to do if he can’t raise rents? Try to sell tenants something else.
Commercial property owners are creating new income by selling travel and phone services, Internet access and cable television to the tenants in their apartment, office and retail buildings.
And they’re charging other marketers the right to sell, or at least advertise their goods and services, to the same captive group of workers and residents. As one analyst puts it, property owners are beginning to consider themselves “gateways to consumers” rather than mere owners of bricks and mortar.
“They’re thinking more like a traditional operating business rather than a collector of assets,” says Craig Leupold of Green Street Advisors, a Newport Beach-based real estate research firm.
Leading the charge are the country’s largest landlords--many of them publicly traded real estate companies--which possess hundreds of buildings and a lot of bargaining power.
Giants such as mall owner Simon Property Group, apartment operator Charles E. Smith Residential Realty and office landlord CarrAmerica Realty say fees for these services, although still a tiny part of the bottom line, are growing at a much more rapid clip than revenue from their primary leasing business.
Executives of CarrAmerica say they expect these ancillary services to make up almost 15% of its bottom line in the third quarter, a big leap from just 4% at the beginning of the year. Simon expects revenue from its marketing efforts to reach $20 million.
But real estate brokers say landlords should exercise caution in selling outside services to their tenants. Most companies don’t need their landlords’ help to cut a deal with vendors, and too much on-site marketing could be an aggravation rather than assistance.
Although current regulations prevent real estate investment trusts from deriving more than 25% of their income from sources other than rent and mortgage interest, most say even a nominal amount of additional revenue could mean the difference between surviving and thriving when real estate markets cool down.
“Now that the acquisition story for real estate and REITs has changed, clearly there is a premium on internal growth,” says Steven Wechsler, president of the National Assn. of Real Estate Investment Trusts, an industry trade group.
Apartment owners were the first to begin exploring ways to squeeze more money out of their existing properties. Beginning in the early 1990s, they began demanding fees from cable and phone companies for the right to sell basic service to its tenants. They also began breaking out parts of each residence to lease separately, such as garages, furniture, microwaves, laundry machines, extra phone lines and Internet service.
Charles E. Smith even reversed the long-established practice of demanding a security deposit. In lieu of a deposit, the East Coast owner of 60 large apartment buildings now requires a nonrefundable “move-in fee” from new residents, which can run as high as a few hundred dollars. “A good share of customers look at deposits as money they will never see back,” says Matthew McCormick, Charles E. Smith senior vice president. Although the company may lose some money on tenants who have been especially rough on an apartment, McCormick says, the landlord generally comes out ahead at least a hundred dollars per tenant with the new system.
Partnering With Giants
But analysts say the real estate company making the most money from its customers is Simon, the country’s largest mall owner.
The company began trading on its large size last year, selling marketers access to the millions of shoppers who crowd its more than 200 malls from Laguna Hills to Long Island.
Through a new subsidiary called Simon Brand Ventures, the retail landlord struck a deal with Pepsi-Cola Co. last year, selling the soft-drink giant the exclusive right to dispense beverages from vending machines at its malls. In recent weeks, it also has allowed the company to set up promotional areas, complete with mini-putting greens, to debut Pepsi’s new soft drink aimed at men, Pepsi One.
Simon also has taken a cue from stadium operators, selling advertising space within the walls of its huge centers. In recent weeks, Simon cut a multimillion-dollar deal with JCDecaux of New York, a maker of advertising street furniture, to lease space on benches and structures housing automated teller machines, directories and phones within Simon’s malls.
Other ongoing ventures include a deal with Microsoft Corp. to provide mall shoppers with Internet access and a copy of its Internet Explorer software, and a credit card partnership with Visa. This credit card pays rebates in the form of gift certificates and allows Simon to monitor buying patterns and tailor promotions for specific customers.
Through these partnerships, Simon reportedly expects to boost cash flow about $20 million, up from $8 million last year. However, these same tactics don’t work in the staid marble-floored environment of office buildings. Landlords of these properties must think more like a concierge, analysts say, providing goods and services needed to run a company’s day-to-day operations, such as telecommunications service, temporary staffing and access to office equipment.
Washington-based REIT CarrAmerica made a leap into these other services last year, paying $50 million for OmniOffice, an executive-suites company that leases space in Carr’s 285 office buildings and others around the country.
Carr executives say they can lease tenants everything from a swanky business address for $99 a month to a small office with phone service, secretarial help, office equipment and conference room time for about $700.
“Now we can talk about renting a conference room for an hour or renting office space for 10 or 20 years,” says Philip L. Hawkins, Carr chief operating officer. “Companies need this flexibility to grow, shrink or move quickly,”
And they are willing to pay much more for this flexibility, sometimes six times the going rate of office space alone, analysts say.
Carr’s latest creation is a new service for telecommuters called Optima, inspired by airline VIP lounges. For a monthly membership fee, salespeople and consultants who typically spend most of their time on the road can plug their laptops in at Carr offices around the country, rather than camping out at a Starbucks or Kinko’s.
By providing these services, Carr hopes it can move small executive-suite tenants into its traditional office space as they grow. It also has sold membership in Optima to 200 of its existing corporate tenants.
“It’s a very profitable business, and one that allows us to build a relationship with a customer,” Hawkins said.
Revenue for OmniOffice has grown from $2.3 million in the first quarter of this year to $6.1 million in the second quarter. By the end of the year, Carr executives expect it to account for 15% to 16% of the company’s bottom line.
Still, landlords and analysts agree, these types of additional service businesses are in their infancy. Many property owners envision being the central point of contact for all kinds of services over the life of a tenant. Apartment owners are exploring the idea of matching their renters up with real estate agents, mortgage lenders and movers and storage when they are ready to leave the complex and buy a house.
Anger and Indifference
In deregulated states such as California, landlords want to be able to cut deals with utilities and many want to find more ways to advertise in their buildings, even if it’s just on closed-circuit televisions in lobbies.
“We wake up in buildings; we go to work in buildings; we use buildings for recreation. Within the envelope of the building, there must be myriad ways to generate a profit,” Wechsler says.
But beware, say some landlords; these money-making ventures can backfire if landlords aren’t vigilant. Should you sell services from a company that turns out to be unreliable--such as a cable company that doesn’t make repairs when it says it will--you could anger your tenants.
And, brokers say, most tenants don’t care about these services. They just want to be in a building that doesn’t cost too much and is heated and cooled properly.
“The bottom line is that the best landlord is one that you don’t know exists,” says Mark Sullivan, managing director of tenant broker Julien J. Studley Inc. “They are just in the background, running the building properly.”
