Common Sense Tenancy Mix Analysis in Retail Property

In a retail property today, the tenant mix is likely to be the ‘make or break’ factor in property performance.  A good tenant mix will help the property thrive and underpin the rentals for the property and the landlord.

So how can you get to know what works?  It is easy to see examples of tenant mix profiles in other properties and then compare them to your property.  Look for the situations that work and those that do not.

Clustering is one factor worth examining in other properties to see how they may handle the cluster concepts.  Whilst you are there, look at their vacancy factors and just how they work with them.

Competing properties will also have factors of tenant loss and relocation; that is a good source of new tenants for your property.

Here are some other tips that can help you in your tenant mix design and property business plan.

  1. Understand the local demographic of customers before you do anything else.  Are there changes in the local area that will impact the customer base now or in the next couple of years?  If so the factors will need to be in your business plan for the property. The business plan should be done every 12 months and reviewed quarterly.
  2. Undertake a customer survey in your property and in the surrounding area.  You will learn so many key things from that process.  Why do people shop in your property?  What would they like to see changed and why?  How often do people come to your property and on what days?
  3. Check out the existing competing properties in the local area.  In this way you will see the differences that their customers see.  Pay particular attention to the access and convenience factors with those properties before you look at the tenant mix internally.  If there is one thing that frustrates many shoppers it is access and convenience.  Can your retail property improve on anything that the other properties are struggling with?
  4. The maintenance of your property will be driven by property layout, customer visits, and building age. Retail property is one of the most costly property types to maintain.  That is why outgoings in retail are so high.
  5. The anchor tenant or tenants in your property are likely to be established on a long lease(s) with appropriate rent reviews.    The anchor tenant profile will help you lease the specialty tenant premises in the property.  Create sound relations with your anchor tenants so the customer targets that they have integrate to the overall marketing plan for the property overall and the general tenant mix.

A great retail property performance is a constantly moving target.  Over time you will be modifying your plans and strategies when new things are seen or the local area changes.  Get involved with the local retail businesses and shopping community; you will soon know what they are looking for.

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.

Choosing the Right Tenant for the Retail Tenant Mix

woman shopping with bags
There are many steps to building a good retail tenant mix.

It is incumbent on any landlord to know his tenant’s business and how it will balance within the overall tenant mix profile. The landlord can then have a sense of how a lease deal can be made to ensure a long-term tenancy. The soundest economic lease agreement most probably will not be the highest rent agreement. Take the following steps when evaluating a prospective tenant:

  • Rent Capability: Question the tenant’s ability to pay the rent being negotiated. Be willing to move the tenant into a smaller or less expensive space if doing so is in both parties’ long-term interest.
  • Profit and Loss history: Ask for the tenant’s other stores’ profit and loss statements for comparative analysis.
  • Sales projections: Ask the tenant for the projected sales at your location. Do the numbers seem high or low in comparison with the per square foot sales of other categories like this in the centre or trade area?
  • Communicate: Establish a trusting rapport going into the tenancy. Handle relationships one to one so you hear of problems before it’s too late to resolve them.
  • Management strategy: Ask about the tenant’s management plan. Is he going to be an absentee owner, or a hands-on operator? Will his management team be able to weather a downturn in the economy or a direct competitor across the street?

Likewise, shopping centre management should continually evaluate existing tenants. Check their sales trends – are they up or down? If they are down, a meeting may be in order to address any existing problems. If your existing tenant has established a strong track record over a number of years, don’t lose him. Communicate. Again, understanding each another’s position will effectively maintain long-term tenancy.

Location Based Retail Anchor Tenants

woman shopping for fruit in a shopping centre
Choose the best tenants to improve your tenant mix.

In larger retail properties today, you need a quality anchor tenant that is location based.  In saying that, they should be closely aligned to the local community and the demographics of the area.  For this reason, leasing managers and property managers should select anchor tenants well and ensure that the anchor tenants will build a customer base into the local area without difficulty.

A strong anchor tenant will encourage more shoppers to a retail property and consequently help the specialty tenants in the property with their trade and sales.  The link between the anchor tenant and the property is therefore high.

To help the anchor tenant with this close alliance with the property, consider the following factors:

  1. The anchor tenant should be encouraged to market their business into the local area.  It is wise to have some guidelines established for that process to occur.  The anchor tenant’s lease can set out some guidelines for that.
  2. The specialty tenants should join with the anchor tenant in a regular marketing effort to promote the property.  The specialty tenants can have a clause in their lease that requires them to pay a percentage of their rent to the marketing fund of the property.  The property manager should administer the marketing effort on behalf of the tenants and the landlord.
  3. The lease for the anchor tenant will need to be a lengthy period of time to give the property some stability over the long term.
  4. Look at how the access to the anchor tenancy is obtained by customers and how that access can incorporate involvement or profiling of the speciality tenants in the property.  Follow the ‘foot traffic’ to see what marketing effort can be established in the ‘corridor’ or pathway to the anchor tenant entry.
  5. The pylon sign on the property will be critical to the image and exposure for all tenants.  The anchor tenant will feature in the signage and then all specialty tenants should be on the same pylon sign.  Look at the pylon sign placement to passing vehicle traffic and pedestrians.
  6. If the local area is serviced by public transport, get some marketing material and posters into the transport systems and drop off points.
  7. Understand just how tenants access the property and how long they stay in the property.  What do they buy when they visit?  These questions will help you understand what the tenant mix requires to strengthen trade for the anchor tenant and the specialty tenants.
  8. Get marketing brochures into the local community and give special attention to seasonal sales or celebrations.  The community will get involved with your property if you create the right atmosphere.

There is a fine balance between the tenants in the property, the community, and the landlord.  The property manager or leasing manager for the property has to bring all of that together.