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SPECIALTY LEASING'S BIG CHALLENGE

How does a $10 billion segment outdo itself?

By Debra Hazel

As specialty leasing has grown into a multibillion dollar business, carts and kiosks like this one at Jersey Gardens have become more sophisticated.

They're not just temporary tenants anymore. Once taken for granted as nothing more than pushcarts good for a few extra dollars at the holidays, the specialty leasing segment has grown into an estimated $10 billion, year-round business that can add millions of dollars to a developer's bottom line.

"We've seen double-digit growth in revenues from specialty leasing," said Ross Nussbaum, retail REIT analyst at New York City-based Salomon Smith Barney. General Growth Properties, Nussbaum noted, has 38 malls generating more than $1 million a year from specialty leasing.

In fact, the segment has become so lucrative that even longtime holdout Taubman Centers has added temporary tenant programs to many of its upscale regional malls.

But as specialty leasing professionals gather this month in Baltimore for ICSC's Temporary Tenant Conference, they face what may be their greatest challenge since the early days of the 1980s: how to top their own success by maximizing existing programs, examining nonretail alternatives and finding new tenants.

One of the biggest obstacles to overcome is how to keep the segment growing, despite limits on the numbers of carts and kiosks that can be placed in a center without detracting from the look of the mall. The most obvious method is ensuring that all carts and kiosks are fully leased all year, instead of just at the holidays.

"There is still upside business because most people don't maximize their properties year-ound," said Deborah Georgetti-Piro, vice president of business development for Chicago-based General Growth Properties. She said it will be another five years before there is a growth plateau.

While most properties should be fully leased for the November/December holiday period, she noted, "We have only one program that is fully leased all year."

A program that has 20 units operating during the holidays may have only 10 operating the rest of the year. The specialty leasing staff must maximize the program throughout the rest of the year either by expanding existing tenants or finding new uses for the carts or kiosks.

Sunglasses take center stage at Stonebriar Centre, Frisco, Texas.

"You might offer an existing tenant a second cart for half the rent," to expand or try a new product, she said.

The consolidation among permanent tenants continues to provide opportunities for specialty leasing, Georgetti-Piro added.

"How many malls are permanently leased all year? There are bankruptcies, and we also fill in those spaces," she said.

Permanent tenants could lease space on a cart for their own clearance times, she added. Using them for advertising also is a possibility.

"We have outdoor advertising that's kind of a sponsorship," said Heidi A. Maybruck, director of specialty leasing for Glimcher Realty Trust, Columbus, Ohio.

Companies consider any lease that is not permanent as part of the specialty leasing program, even advertising.

"We have billboard signage that's really hot now; there's light-pole advertising in the parking lot," Maybruck added.

"There are major venues for advertising: Centerlinq, Big Fat Wow. That's a huge amount of revenue to the bottom line of a company."

Taubman is focusing on building up its temporary in-line program (being used in all of its centers), as well as its new centers, according to Anita Saleh, vice president of specialty leasing at Taubman, Bloomfield Hills, Mich. Saleh joined the firm in late 1997 and helped launch its first program at Woodfield Mall in September 1998.

"I've observed other companies; they've added different venues, including Internet strategies," Saleh said.

Bringing a specialty leasing program outside the mall is another possibility, General Growth President and COO Robert Michaels noted. He's not the only one with that idea.

"The parking lots are in my thoughts — we're having carnivals and circuses and other income," Maybruck said. "I'm looking at building storage sheds on the outer perimeter of the property because there is no storage for my temporary tenants to utilize. So we are clearly going out of the common area. If we have a mall and a strip center — for example, Glimcher has River Valley and River Valley Plaza — we'll use one of those spaces as alternatives for storage."

Even after existing programs are maximized through new tenants, revenue increases will still be possible, said Coleen McNelis, director of lease management at The Macerich Co., Santa Monica, Calif.

"You can increase the rents, do creative things with wall space. That's the way we will continue to grow," she said. Ultimately, though, observers feel that finding new retailers will always be the key to specialty leasing's continued success and expansion.

"We're searching for the mom-and-pops and regionals and hoping they expand. If they deal with you and trust you, they're going to stay with you," Georgetti-Piro said.

And that's where the fun, and the challenge, of the specialty leasing industry remain.

"It's like a rebirth in a way. I think specialty leasing has become a little complacent in the sense that we know we're going to have the Calendar Clubs, we know we're going to have the Waldenbooks Day-By-Days. We know we'll have national retailers. Let's go back to the beginning when we found the bright-eyed, bushy-tailed entrepreneur at a flea market or fair. It's a rebirth, a finding a brand new idea," Maybruck said. "That's what specialty leasing is."

Segment hits $10B mark

In the past 10 years, the dollars generated by temporary tenants have grown into a $10 billion a year business, according to the trade journal Specialty Retail Report. "It has gone from being something relatively insignificant to something very important," said Robert Michaels, president and COO of General Growth Properties, Chicago, the giant mall REIT. But exactly how important is difficult to quantify: Many developer/managers do not break out temporary tenant revenues. One of the few companies that does, The Macerich Co., Santa Monica, Calif., reported that its specialty leasing department generated $30 million in sales in 54 malls last year. "That's a good chunk of change," said Coleen McNelis, director of lease management at Macerich. Overall company revenues came to $347.4 million last year. Even smaller mall companies do well. "A lot of programs are doing $10 million per year," said Patricia Norins, publisher of Specialty Retail Report, Norwell, Mass. — D.H.

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