Shopping Centre Managers – Retail Property Leasing Specialisation

woman shopping for pears in supermarket
Retail shop leasing requires special knowledge and experience.

When you work in commercial real estate, you will see those ‘retail specialists’ in the local area that focus within the retail property market.  Those retail people are very specialized given that their property type is quite specific and heavily geared to the local demographic.

In simple terms, a retail leasing specialist or property manager should help retail tenants improve their business and on that basis improve property occupation.  When all of this occurs correctly, the prevailing market rental for the property will be underpinned and potentially grow.  Over time this will also help the landlord for the property achieve a better price if and when the property comes up for sale.

So there is a significant link between tenant selection, retail trade, property leasing, and property performance.  For this very reason those of us in the industry that understand retail property do so at a very high level and can talk across a large variety of strategies that relate to retail sales, leasing, and shopping centre management.  The clients that we work for and especially those that own any complex retail property will only work use the best retail property people in the industry.

There are many things that should be considered and consolidated into your retail experience and knowledge base.

  1. Market rentals will change from property type to property type.  They will also change by location within the property.  The positioning of a tenancy inside a retail premises will dictate the levels of rental, as will the size of the premises.  There is no fixed and firm equation that can be provided to help you here, except the process of gaining market awareness and information from comparable properties.  Over time you will understand what makes a property location different than others.  You will also understand the priorities of tenancy location that will boost the rental in one particular spot or one particular property.
  2. Different businesses can pay and absorb different levels of rental as part of property occupation.  As a case in point, you will find that one tenancy type can pay more rental than another tenancy type.  For example you could compare a shoe repair type tenancy to a food type tenancy.  The levels of rental from each will be completely different for the same shop location, given that they will have separate levels of turnover relative to their business type.  If the rent is too high for the business type, they will simply disappear as a tenant.
  3. Different retail leases and different lease strategies will occur all the time.  You become a strategist when it comes to utilising rental incentives, gross rent, net rent, lease terms, rent reviews, and option strategies.  All of these are negotiated with due regard to the plans of the property owner, the age of the property, the tenant, and the demographics of the shopper.
  4. When it comes to retail property, the success of the tenancy mix will largely be driven by the demographics of the area.  Stay on top of the changes to the local property demographics and ensure that the property matches the current and future needs of the local community.  That being said, you really do need to know exactly who your shopper is and why they visit the property.  You also need to know what they require and when they need it.
  5. Tenant enquiry for new premises will change from time to time based on the regional and local business sentiment.  For this very reason, you should be staying very close to the retail businesses and franchise groups.  All of those people in your database should be contacted regularly to identify any changes in leasing needs or opportunities.
  6. Watch the activities of any competing retail properties in your area.  That will include the tenancy mix, expansion and contraction factors, refurbishment, and relocation challenges.  These trends and activities will give you some leverage in leasing and property performance.

Retail property people are specialists in their property craft.  Their knowledge and expertise will be sought after when it comes to the larger shopping centers and the bigger retail leasing needs.  Franchise groups and anchor tenants will also seek the assistance of retail property specialists.

Symptoms to Watch for in Retail Tenant Mix Performance

female shoppers with shopping bags
Watch your retail tenancy mix for any shifts in trade or sales.

Retail property performance is a fine balance of a number of relationships between the tenants, the landlord, and the community.  When the balance is correctly established and maintained you can see the retail property and the tenants thrive.

In pressured times like that of today where retail trade is impacted by the internet and economic sentiment, the retail property manager has to be very close to a number of key issues in their managed property.  In that way they can stave off many of the problems that can occur with the property over time.

Here are some factors to monitor and address:

  1. Tenants with lower levels of stock should be observed and questioned.  The lower levels of stock may be the result of a recent stocktake sale, or they can be the result of a shift in sales results.  You are looking for tenants that are not performing well in sales or that are changing their service or product offering to that which is not permitted under the terms of the lease.
  2. Changes to the staffing of tenancies and businesses will be an indicator.  If the employees in the tenancy business are under constant change, it is wise to understand what is going on and why it is happening.
  3. Tenants that need to relocate should be worked with.  If their business is under pressure, it is better to achieve a process of cooperation to help them in stabilising.  Any alternative is likely to involve a protracted vacancy and that is not going to help anyone.
  4. Tenants that do not maintain presentation of premises or stock will drag down the other tenants in close proximity.  Quality lighting and good levels of presentation are really important in retail property.
  5. Clustering advantages or pressures in a property can help you either way when it comes to sales and tenant mix.  Look for the tenants that can build sales from each other.  Build clusters of tenants that work for you.  The results will be a stronger market rent.
  6. Anchor tenant weakness or trade problems should be addressed quickly.  Any customer perceived weakness in the anchor tenant will soon reflect in a property decline in sales.
  7. Lower levels of sales in the property or with some tenants will be a concern.  The sales in the property should be tracked by tenant and by tenant category; in this way you will see how the property and the tenants are tracking in the local community seasonally.
  8. Shifts in customer demographic will produce a change in sales.  Look for those changes and help the tenants to act early.  Profile your community at least once per year and ask the customers what they expect from the property and what they like about it.
  9. New property developments to occur in the local area will detract from your customer base.  Watch out for new properties coming up for sale or lease that shift the balance of supply and demand.
  10. Higher incentives in getting a new tenant to your property will occur from time to time depending on the supply and demand for local retail space.  Be flexible and adaptable when it comes to incentives for new tenants.
  11. Competing properties in the local area can be taking some or all of your trade.  Monitor these other properties frequently and watch for changes in the anchor tenant offering or levels of trade.  If the anchor tenant changes, it is likely to shift the retail balance in the entire local area, and other retail properties.
  12. Aggressive landlords that attempt to push the rental of the property too high can threaten the tenant mix stability and the viability of a tenants business to operate.  Tenants will soon spread the word of any difficulty with the landlord, and that can have an impact on the property overall and any future leasing requirement.

A retail property is a special place for shoppers and tenants.  Manage your retail property well and with a base strategy that encourages trade for all concerned.

If you want more tips on retail property you can get them in our newsletter on this site.

Finding More Retail Tenants for Your Tenant Mix

girl shopping for CDs and music
Choose the best tenants for your tenant mix by checking out the competing properties and tenants.

When you manage or lease retail property or premises within a shopping centre, it can always be a challenge to find the right type of tenants for the vacancies as they arise.  It is important to stay ahead of your vacancy problems and challenges within the tenancy mix.

If a tenant is nearing the end of their lease, it is simply a matter of them vacating the premises or a new lease being created.  If you work 12 months out from the event, you can plan whatever steps are necessary to resolve the vacancy quickly and effectively.

Here are some tips to help you with finding tenants to lease retail property:

  • Monitor the activities of other shopping centres nearby.  They will have some tenants looking to move or change premises for a variety of reasons.
  • Keep in contact with all the franchise groups through the region and nationally.  They may be looking for new premises for another franchise tenant location.  That being said, you will need to understand the lease requirements and lease documentation standards that apply to each franchise group.  It is likely that the lease documentation will be different to that which the landlord would normally use.
  • Create a retail leasing property update newsletter.  This newsletter can be circulated through the retail business community in your local area.  In the newsletter you can provide tips and ideas regards leasing new premises.  Given that most businesses have Email contact, a newsletter can be based on the use of an auto responder and an Email System.
  • Maintain regular contact with all the businesses through the local area.  Have particular focus on the successful businesses with strong branding.  Give them regular property updates so they can understand the changes in rental and incentives as they apply to retail property.
  • The anchor tenant in your retail property will have a significant impact on customer visits to the property and the trade for the specialty retail tenants.  A good anchor tenant will also attract new tenants to your property.  Encourage the anchor tenant to interact with all the specialty tenants in the shopping centre.
  • A shopping centre that is well maintained and marketed to the community, will be of attraction to new tenancies.  Ensure that your property satisfies both of these issues.  Establishing a productive marketing campaign to attract more shoppers to the property through all of the trading seasons.

When it comes to leasing and managing retail premises, early lease negotiations and preparation for any new tenant vacancy, marketing, and occupancy are key strategies to adopt.  A retail property is a vibrant and yet challenging type of property investment.  Work with your tenants at the earliest possible time, and you will find good results for all concerned.

Vacancy Rates in Retail Property Today

woman walking in shopping centre supermarket
Get your vacancy rates down. Monitor all leases and tenant changes. Find new tenants fast.

The most important step in keeping your shopping centre or mall occupied is realising the total economic impact of having to re-lease the space.

Consider the effect should one of your tenants go out of business:

  • Can you find a replacement tenant?
  • If so, how long will it take?
  • Will you be able to achieve anywhere close to similar rental from a new tenant?
  • What will legal fees cost you, if you choose to go after the old tenant for leasehold performance?
  • What will leasing commissions for a new tenant cost you?
  • What will tenant improvements cost, plus an inevitable period of free rent?

Unless you have awfully deep pockets, you can’t afford substantial vacancy in your centre – so you can’t afford to ignore your tenants’ concerns.

  • Be willing to listen to their concerns. Tenant feedback can be most helpful.
  • Work on a new promotional campaign – with tenant input.
  • Does the centre need repairs? Paint or landscaping, for example? Consider the costs of repairs versus the cost of re-leasing should several tenants decide to leave.
  • Always search for ways to improve your centre. Strive to achieve the most dynamic tenant mix. If a tenant vacates, work hard to improve that space with a promotional tenant who will help the rest of the centre.
  • Finally, know your competition. If your centre is not competitive with those in the surrounding area and your centre management responds with complacency, the centre is doomed to failure.

Retail Rental Tips

man pushing a shopping cart
Consider your retail rental carefully as part of your tenant mix.

The idea of lowering rents in a tenant mix strategy may not be a popular topic among shopping centre or shopping mall owners, but cash flow is still cash flow.

There is great value in communicating with your tenants and understanding their reality, as well as your own. Again, deal with each rental renegotiation on the specific circumstances of that lease. Know too, however, that a rental reduction, if necessary, may be recaptured in the following ways:

  • Percentage rent increase. If the tenant’s sales are off during a bad economy, presumably they will go up when times get better. The landlord can then recapture from a lower base rent via increased overage rent.
  • Deferred rent. If the tenant is having trouble, consider lowering the rent, with a deferred lump-sum payment at a specified date or on a stair-stepped basis to ultimately bring the rent back up to an acceptable level.
  • Term extension. As a trade-off for a reduced rent for a quality tenant, ask for a lease extension with gradual escalations. This will help assure long-term occupancy and profitability.
  • Advertising. Require that the tenant agree to spend a substantial percentage of any rental reduction toward advertising and promotion, in an attempt to increase sales.

Retail Property Tenancy Schedule

woman reading a file
Go through the tenancy schedule in great detail and check it against the leases.

The tenancy schedule is the tool of choice for a property manager or leasing manager in a commercial or retail property investment. It is the tenancy schedule that will keep the property manager up to task on forthcoming events and dates.

Often you find that the tenancy schedule is not up to date, so if anyone gives you such a document, treat it with the caution it deserves, and check it out completely before you act on the information contained therein.

So let’s say that you have a great tenancy schedule that you know is totally accurate. I get many questions about what I would want to see in a tenancy schedule. Here are my main priorities:

  • Details of the tenant name, lease, and full contact detail for emergencies
  • Tenancy identifier or suite reference that comes from the plan for the property
  • The area of the tenancy in m2 or ft2 (depending on your unit of measurement)
  • The % of the tenant area to the building net lettable area
  • The rent $’s per annum, per month, and per unit of measurement (m2 or ft2)
  • Lease start date
  • Rent start date
  • Lease end date
  • Term of lease
  • Option term of lease
  • Anniversary dates and reminders for rent reviews, options, expires, renewals, renovations, and make good obligations
  • Outgoings charges for each tenant on the basis of area and monthly charge
  • Outgoings budget for the building
  • Total outgoings recoveries for the property on a currency and % basis
  • Types of outgoings to be charged to the tenants
  • Insurance obligations of the tenant
  • Rental guarantee details or bonds held
  • Provision for critical dates relating to any important lease term or condition
  • Maintenance obligation details of the tenants

 

This list is not finite and you can add your own extra priorities, I would however make sure that it is totally correct and maintain it to the highest level of accuracy.

When you do this you can stay on top of important upcoming events that will impact the occupancy or rental of the property. Whilst you can buy ‘off the shelf’ software programs that display this above information, that can be quite expensive for those commercial and retail property managers that are first entering this type of property.

The alternative is to create some simple spread sheet that contains the data; in saying that, it is essential that great care is taken to maintain the spread sheet that you create. Any errors in the tenancy schedule can destroy your landlord, your business, your tenant, your reputation, and the property. Accuracy is paramount.

Financial Assessment of a Retail Property

Financial calculator
Check the income and expenditure for your retail shopping centre.

When assessing retail property tenancy mix, it is necessary to understand the financial factors that the property creates. In doing this, it is not only the financial factors today that you need to look at, but also those that have formulated the history of the property over recent time.  In this case, the definition of ‘recent time’ is the last three or five years.

It is surprising how property owners try to manipulate the building income and expenditure at the time of sale; they cannot however easily change the property history and this is where you can uncover many property secrets. Once the history and current performance of the property is fully understood, you can then relate to the accuracy of the current operating costs budget. 

All investment property should operate to a budget which is administered monthly and monitored quarterly.  The quarterly monitoring process allows for adjustments to the budget when unusual items of income and expenditure are evident. There is no point continuing with the property budget which is increasingly out of balance to the actual property performance.

Fund managers in complex properties would normally undertake budget adjustment on a quarterly basis. The same principle can and should apply to private investors.

So let’s now look at the main issues of financial analysis on which you can focus in your property tenancy mix evaluation:

  1. A tenancy schedule should be sourced for the property and checked totally. What you are looking for here is an accurate summary of the current lease occupancy and rentals paid. It is interesting to note that tenancy schedules are notoriously incorrect and not up to date in many instances. This is a common industry problem stemming from the lack of diligence on the part of the property owner or the property manager to maintain the tenancy schedule records. For this very reason, the accuracy of the tenancy schedule at time of property sale needs to be carefully checked against the original documentation.
  2. Property documentation reflecting on all types of occupancy should be sourced. This documentation is typically leases, occupancy licences, and side agreements with the tenants. You should expect that some of this documentation will not be registered on the property title. Solicitors are quite familiar with the chasing down all property documentation and will know the correct questions to ask of the previous property owner. When in doubt, do an extensive due diligence process with your solicitor prior to any settlement being completed.
  3. The rental guarantees and bonds of all lease documentation should be sourced and documented. These matters protect the landlord at the time of default on the part of the tenant. They should pass through to the new property owner at the time of property settlement. How this is achieved will be subject to the type of rental guarantee or bond and it may even mean that the guarantee needs to be reissued at the time of sale and settlement to a new property owner. Solicitors for the new property owner(s) will normally check this and offer methods of solution at the time of sale. Importantly, rental guarantee and bonds must be legally collectable by the new property owner under the terms of any existing lease documentation.
  4. Understanding the type of rental charged across the property is essential to property performance. In a single property with multiple tenants it is common for a variety of rentals to be charged across the different leases. This means that net and gross leases can be evident in the same property and have different impact on the outgoings position for the landlord. The only way to fully appreciate and analyse the complete rental situation is to read all leases in detail.
  5. Looking for outstanding charges over the property should be the next part of your analysis. These charges would normally stem from the local council and their rating processes. It could be that special charges have been raised on the property as a Special Levy for the precinct.
  6. Understanding the outgoings charges for the properties in the local area is critical to your own property analysis. What you should do here is compare the outgoings averages for similar properties locally to the subject property in which you are involved. There needs to be parity or similarity between the particular properties in the same category. If any property has significantly higher outgoings for any reason, then that reason has to be identified before any sale process or a property adjustment is considered. Property buyers do not want to purchase something that is a financial burden above the industry outgoings averages.
  7. The depreciation schedule for the property should be maintained annually so that its advantage can be integrated into any property sales strategy when the time comes. The depreciation that is available for the property allows the income to be reduced and hence less tax paid by the landlord. It is normal for the accountant for the property owner to compile the depreciation schedule annually at tax time.
  8. The rates and taxes paid on the property need to be identified and understood. They are closely geared to the property valuation undertaken by the local council. The timing of the council valuation is usually every two or three years and will have significant impact on the rates and taxes that are paid in that valuation year. Property owners should expect reasonable rating escalations in the years where a property valuation is to be undertaken. It pays to check when the next property valuation in the region is to be undertaken by the local council.
  9. The survey assessment of the site and tenancy areas in the property should be checked or undertaken. It is common for discrepancies to be found in this process. You should also be looking for surplus space in the building common area which can be reverted to tenancy space in any new tenancy initiative. This surplus space becomes a strategic advantage when you refurbish or expand the property.
  10. In analysing the historic cash flow, you should look for any impact that arises from rental reduction incentives, and vacancies. It is quite common for rental reduction to occur at the start of the tenancy lease as a rental incentive. When you find this, the documentation that supports the incentive should be sourced and reviewed for accuracy and ongoing impact to the cash flow. You do not want to purchase a property only to find your cash flow reduces annually due to an existing incentive agreement. If these incentive agreements exist, it is desirable to get the existing property owner to discharge or adjust the impact of the incentive at the time of property settlement. In other words, existing property owner should compensate the new property owner for the discomfort that the incentive creates in the future of the property.
  11. The current rentals in the property should be compared to the market rentals in the area. It can be that the property rent is out of balance to the market rentals in the region. If this is the case it pays to understand what impact this will create in leasing any new vacant areas that arise, and also in negotiating new leases with existing tenants.
  12. The threat of market rental falling at time of rent review can be a real problem in this slower market. If the property has upcoming market rent review provisions, then the leases need to be checked to identify if the rental can fall at that market review time. Sometimes the lease has special terms that can prevent the rent going down even if the surrounding rent has done that. We call these clauses ‘ratchet clauses’, inferring that the ‘ratchet’ process stops lower market rents happening. Be careful here though in that some retail and other property legislation can prevent the use or implementation of the ‘ratchet clause’. If in doubt see a good property solicitor.

So these are some of the critical financial elements to look at when assessing a tenancy mix. Take time to analyse both the income and expenditure in the property before you making any final choices regards tenant strategy.