Dedicated ancillary income programs for shopping center owners and managers began with malls and lifestyle centers, because efforts were initially focused on kiosks and carts and temporary in-line tenants. Roughly a decade ago neighborhood shopping center owners began introducing such programs to boost net operating income, and now the practice has become standard operating procedure as opportunities have blossomed and the amount of income generated has grown exponentially.
Cincinnati-based Phillips Edison & Co.’s first attempts at ancillary income programs took the form of leases to Halloween shops, and in the fourth quarter of 2008, the company added about $250,000 to the bottom line, according to Eric Richter, Phillips Edison’s vice president of property management. Today the company’s goal is to transact some $4 million worth of ancillary income deals annually.
For a mall company, that may not seem to be much, but for an owner of grocery-anchored shopping centers, it represents a healthy boost to the balance sheet. It can be achieved because of the wide variety of ancillary income opportunities that are available: seasonal leasing, cell towers, flowers, Christmas tree stands, billboards, ATMs, vending machines, tent sales, festivals and so much more. Then too, new technologies can mean new opportunities. Cell towers have been around for about 25 years, but communication companies today want to add the likes of small antennas, on rooftops or light poles.
InvenTrust Properties Corp., of Oak Brook, Ill., created a department for specialty leasing and ancillary income in October 2014. “Within a year we tripled our ancillary income for the company,” said Lindsay Major, InvenTrust’s specialty leasing manager. “Specialty leasing’s contribution to net operating income is continuing to grow.” But neither InvenTrust nor any of the other sources in this article were willing to cite specific ancillary-program-related income percentage figures.
Among the trending opportunities at InvenTrust’s specialty leasing department are advertising deals (light-pole banners, mini-billboards and semipermanent structures), pop-up clearance centers and temporary furniture stores. “I have been working with Overstock Furniture for over a year, and they have been opening temporary furniture stores across the country,” said Major. “They are a quality operator and lease big-box space for a minimum of two months and often occupy the space until it is leased to a long-term tenant.”
There are challenges, to be sure. Given a lack of new construction, vacancies are diminishing. “Most furniture stores want 15,000 square feet, but we don’t have that inventory,” said Richter. “On the other hand, Halloween stores want 15,000 square feet, but now we are squeezing them into 5,000 square feet.”
Jenny Westbrook, managing director of specialty leasing in the Charlotte, N.C., office of Kimco Realty, also cites some challenges. “If you don’t have vacancies, you can’t do temporary stores, plus the shopping center may have restrictions limiting, for example, kiosks, and many leases have tenant exclusives or prohibitions on certain uses or common-area locations.” Other new opportunities include cellular antennas and electrical charging stations for phones and cars. “A lot of times people come to us and say, ‘Can you accommodate this or that type of use?’ — but we are trying to branch out and come up with new ideas, trying to maximize values at our shopping centers,” said Westbrook. “In the open-air shopping center environment, ancillary income used to be nominal at best, and now it’s a couple of percentage points of NOI contribution, and that contribution is getting bigger.”
Ancillary income programs must boost a center’s profitability without interfering with day-to-day business and tenant sales, says Kimberly Daskas, president of Creative Clarity, an Orange County, Calif.–based consulting firm that creates and oversees marketing and sponsorship opportunities for shopping centers. “There are events, say a 5K race, that come to you and need to have a start/finish line, race route and expo,” said Daskas. “You don’t always charge, because it just becomes an event on your calendar that brings a lot of people to your center — and, in essence, dollars are generated, but it is really through traffic and sales. It is up to you to capitalize on such activities and increased traffic. Then there are commercial filming activities and parking lot events for which you would charge. It’s a balance, because some events don’t pay a fee to be there, but [they] translate into increased sales.” One unusual ancillary income opportunity that Daskas likes to introduce is to work with local home and apartment developers.
Olshan Properties, a New York City–based developer and operator with a wide portfolio of real estate beyond just shopping centers, now looks at ancillary income opportunities across all its sectors. “In general, our companywide ancillary income program has increased 100 percent over the past few years, with a more holistic portfolio approach,” said Lynn Meredith, Olshan’s executive director of operations and marketing.
Olshan says its ancillary programs are not just about measuring income, but also about enhancing properties and offsetting operating expenses.
A few Olshan properties have an agreement with Time-Warner Cable to install hotspots and also to sponsor a concert series that drives traffic to retailers and restaurants. “Certainly, there is a significant value to those agreements, though it is not measured in straight income,” said Meredith. Olshan aggressively seeks ancillary income programs focused on temporary leases, because those tenants may want to become long-term lessees. “Recently, Peloton, a former temporary fitness-bike tenant, signed a permanent lease at The Gate at Manhasset (N.Y.) property after experiencing such success,” Meredith said. “At Zona Rosa, in Kansas City, Google Fiber opened as a temporary pop-up, and the company just signed a two-year lease. Sometimes new-concept tenants need to test-drive the market first.”
