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MORE CHAINS FARM OUT REAL ESTATE OPERATIONS

BY ANNA ROBATON

Off-price apparel seller Loehmann’s has decided to focus on what it does best: sell off-price apparel.

What that means is that the New York City-based operator of 50 stores U.S.-wide is following an industry trend and leaving its real estate concerns to an outside firm.

“We are retailers,” said COO Robert Glass. “We are not real estate people. We hopefully know how to buy and sell merchandise.”

Retailers have long relied on brokers to help find new sites, but they are increasingly turning to outside firms for help with real estate needs once handled exclusively in-house, sources say, from strategic planning to lease negotiation to facilities management.

“It is becoming more and more of an accepted practice,” said John M. Crossman, a principal of Trammell Crow Co., Dallas, one of the country’s largest real estate services firms. “With the bigger tenants, it is surprising not to see some level of outsourcing.”

Outsourcing real estate functions allows retailers to keep costs in line with growth, observers say. Chains in the early stages of growth are especially turning to third-party firms for help with such things as analysis of unfamiliar markets.

Loehmann’s, for one, relies on Pearl River, N.Y.-based Katz & Associates for help with strategic planning, site selection and lease negotiations. The arrangement allows Loehmann’s to control costs and maintain the same level of staffing regardless of its growth plans, says Glass. Founded in 1966 by Daniel B. Katz, former head of real estate at retail holding firm Melville Corp., Katz & Associates works directly with Loehmann’s top executives, including the senior vice president of stores, the COO and the CEO.

Katz & Associates also gives Loehmann’s a boost on site selection through its local-market research services and connections with landlords. “They have their ear to the ground,” Glass said. “They know the demographics of the areas we want to go into, and they present those opportunities to us.”

Be my bodyguard
It is not only well-established names that are exploring these outsourcing options. Small to mid-size chains, too, seek leverage in negotiations with landlords, whose clout has risen with the consolidation in the shopping center industry. Outsourcing does not necessarily mean downsizing, sources say. Some retailers are using third-party firms to supplement staff. Verizon Wireless, for example, enlisted Dallas-based Staubach Retail, part of national real estate advisory firm The Staubach Co., two years ago to help run its real estate operations in the South. Today Staubach has several employees on-site at Verizon offices in Alpharetta, Ga.

Staubach manages Verizon’s relationships with brokers and provides market research services. And it has streamlined the company’s site-selection process, says Dean Jones, Verizon Wireless’ director of real estate and facilities in the South. Verizon now uses fewer brokers and requires them to provide the same information on potential locations. “We are getting better results than we had in the past,” Jones said.

The arrangement has allowed Verizon to stay flexible with personnel. “If my volume goes up and I need to staff up, I can go to Staubach,” Jones said. “It is easier to staff down during down times.”

For some retailers, outsourcing is only a temporary solution. This is especially true for relatively young companies, such as Coldwater Creek, which hired Staubach to handle site selection and lease negotiations when it was first expanding beyond catalog operations in 2000. Eventually, the Sandpoint, Idaho-based women’s apparel retailer decided to assemble its own team, hiring several real estate executives from Gap Inc. with strong ties to shopping center landlords and insight into markets around the country.

“We are a very hands-on organization,” said David Gunter, a Coldwater, spokesman. “And we like to steer and control as many aspects of the business as we can.”

Eager to serve
Of course, this growing willingness on the part of retailers to farm out all or part of their real estate operations, even if only temporarily, has third-party firms competing even more intensely for their business. And some of the biggest players, including Staubach, Trammell Crow and CB Richard Ellis, have continually added new services, expanding far beyond traditional brokerage into such areas as development, strategic consulting and construction management.

“It’s more of a consultative practice versus a [transaction-oriented] practice,” said David Cheatham, a senior vice president in the retail corporate services division of Los Angeles-based CB Richard Ellis. “So the skill set of your people needs to be higher.”

Many firms have sought to boost their appeal among retail clients by hiring employees from the real estate divisions of major chains. This has helped to mitigate the job losses caused by outsourcing, which some observers say have been minimal.

“The consulting business has been around for a while, and I don’t think it has had an effect on in-house real estate people,” said Charles S. Gervais, a former executive of Limited Brands who co-founded GCD Consultants in 1985. “It has functioned mostly as an adjunct to an in-house department, as opposed to a replacement for it.” Like Katz & Associates, GCD has focused primarily on helping chains strategize growth and select sites, and on representing them in lease negotiations.

In the mid-1980s there were “only about two other companies doing this [type of work], and a few individuals,” recalls Gervais, whose firm has offices in Boston, Chicago, New York and Phoenix. “The industry has grown tremendously.”

Even so, heads of real estate at retail companies seem to have no reason to fear for their jobs. Even retailers that outsource aggressively are likely to have at least one executive in charge of real estate operations, sources say.

“Many roles that were traditionally inside roles are being farmed out, but the most strategic roles around the portfolio remain inside,” said Steve Dawkins, COO of Staubach Retail.

We’re good, thanks …
Some retailers have resisted the trend entirely. These include such big chains as Gap Inc., which already has tremendous leverage with landlords and prefers to maintain the level of control that comes from negotiating its own deals. The company does use brokers to get market information and stay plugged into potential new sites. But Alan Barocas, its senior vice president of corporate real estate and construction, oversees a staff that includes 20 executives responsible for cutting deals with landlords.

“There is no doubt in my mind what their motivation is and where they have their priorities,” said Barocas. “They are not compensated on numbers of deals. We have many other [compensation] criteria.”

Shopping center landlords and mall managers say it makes no difference to them whether they deal directly with retailers or with third parties representing them, although working with the latter can be slightly more time-consuming because they lack ultimate decision-making authority.

“The consultant typically has less autonomy and less authority in terms of getting whatever deal they are working on ultimately approved,” said David Hull, director of leasing for Jones Lang LaSalle Retail, one of the largest third-party mall management firms in the country.

Nonetheless, many of today’s consultants are as savvy as the chains they represent, Hull says, largely because many come from retail and shopping center companies themselves. “Generally, you find a high level of expertise with the consultants,” Hull said. “They have typically come out of a retail background or worked for a shopping center manager in the leasing field.”

For that reason, and others, Loehmann’s and its like are happy to leave the real estate business to them.