Many real estate professionals associate ancillary income with only malls and lifestyle centers, believing that kiosks and temporary tenants can only thrive in those environments.

However, the strip shopping center environment is also ripe with ancillary income opportunities -- including many that are permanent and generate a long-term impact on NOI. I talked more about this during my panel discussion at ICSC RECon 2013, where I was asked to give a “big idea” for increasing shopping center profitability over the next year. The direction I strongly recommended to those in attendance was to institute an aggressive ancillary income program, and I offered a few suggestions and examples.

Combining permanent and temporary leasing

Landlords have experimented with a wide range of ancillary income sources for years. Some are temporary opportunities, while others are permanent. Some forms of permanent ancillary income for shopping centers include:

  • Pylon sign rental
  • Cell towers
  • Billboards
  • Pole banners and flags
  • Free-standing ATMs
  • Vending machines

Some forms of temporary ancillary income for shopping centers are:

  • Short-term temporary leasing, such as holiday express stores
  • Short-term seasonal leasing, such as Halloween stores
  • Tent sales in infrequently used areas of the parking lot, such as for the sale of Christmas trees and fireworks
  • Recycling bins for used clothing, shoes, and books in the parking lot
  • Parking lot events, such as a carnival or flower sale

Naturally, permanent opportunities are the big fish to go after. At the same time, temporary opportunities should not be overlooked, because they can help create a solid ancillary income program that unlocks value and improves overall asset performance.

Specialty leasing leadership

Devising solid ancillary income programs requires many of the same resources, skills, and data needed for a successful permanent leasing effort, including a solid understanding of the market, tenant mix, and municipal regulations.

We’ve found the job requires placing a specialty retail representative at the helm. Some landlords might think their permanent leasing directors would be the most logical people to lead ancillary income programs. However, leasing directors often have their plates full already with permanent leasing activities. The most successful ancillary income programs are typically led by specialty retail representatives who are skilled in and dedicated to ancillary income activities.

As a result, open communication is crucial. Specialty leasing and permanent leasing must coordinate their efforts to avoid leasing conflicts. Both need to identify vacancies suitable for a temporary tenant, make certain that there are no conflicts with the permanent tenant mix in the shopping center, and finally, understand all relevant municipal regulations and restrictions.

Profit potential

We’ve used this teamwork at Kimco to develop a rapidly growing ancillary income program which has generated significant increases in profits for many centers in our portfolio. For example, we examined five shopping centers in Florida that had a similar level of ancillary income drivers, including temporary leasing, seasonal parking lot licenses, recycling bins, and advertising. The ancillary income for these centers over the last three years combined was just under $1 million.

Of those five contributions, the lowest was approximately $150,000 over three years and the highest was $300,000 over three years. Let’s take the lowest contribution for a moment. After some calculation, you can see that this center generated an average of $50,000 annually in ancillary income.

Now divide that by $15 per square foot, which is about the average cost per square foot of retail space in the U.S. (It was $14.48 at the end of Q1, according to CoStar. But we’re rounding for simplicity’s sake.) You arrive at 3,333 square feet, which means this particular ancillary income program is equivalent to having a 3,333-square-foot tenant in the shopping center at zero cost because we never built new space.

When you do the math for the highest contributing center, you end up with the equivalent of a 6,666-square-foot tenant in the center at no cost. Analyzing the ancillary income program in these terms gives you a sense of how meaningful the program can be to the bottom line.

A well-structured ancillary income program can generate a significant profitability boost. A well-resourced specialty leasing team, coupled with creativity and innovation, can lead landlords to more impactful ancillary income programs that drive long-term NOI.