Retail Shopping Centre Leasing Strategies that Work

When it comes to leasing a retail shopping centre, the mechanism of leasing can be quite specific and specialised.  That is why some leasing experts only specialise in retail property.  It is a very special part of the property market requiring good market knowledge and excellent tenant contact.

A shopping centre or a retail property is a vibrant business environment and it needs to be understood for the best leasing results to be obtained.  To a great degree, the success of the tenants will be generated from property performance, tenant mix, customer interaction, and the landlords support.  There are many ways that these issues need to evolve if the retail property is to succeed for the long term.

Here are some tenant mix strategies to apply to a retail shopping centre to assist the leasing process and the overall tenancy mix.

  1. The tenants that are chosen for the property should be the tenants that satisfy the demands of the local community and customers.  Tenants that are well matched to the local demographic will attract more customers to the property over time.  Tenants of this type should be integrated into the overall tenancy mix at strategic places and within specific retail clusters.  Clusters of tenants generate more sales in the property.  A cluster is a specific retail tenant mix strategy.
  2. Get to know the franchise groups in the local area that may require premises in your property at any future time.  There will also be other franchise groups that are not yet located in your region or town.  Connect with all the franchise groups that have a reasonable retail offering and therefore potentially an attraction to your customer base.  Understand what these franchise groups require of a property, and population demographic.  They will also have certain terms and conditions that relate to their lease occupancy and property selection.  In many cases they will share that information with leasing professionals in preparation for identifying the right property.  Get to know the franchise groups.
  3. Monitor the activity of all competing retail properties locally.  That will include the rental profiles, vacancy activities, and lease occupancy.  Selectively approaching the tenants within these properties will help you with market intelligence and leasing strategies.
  4. Identify any new property developments that are soon to be released on the market.  They are likely to shift the balance of available space and rental across the region.  They will also try to entice tenant movement through attractive incentives.  That can then make any older properties in the area less attractive to some tenants.  The only way to combat this problem is through competitive rentals, and exceptional property performance.  Retail tenants will always be attracted to properties that integrate well into their customer base.  Make sure your retail property does exactly this.
  5. Your existing tenancy mix will contain tenants that are more or less attractive to the future of the property.  You will require a tenancy retention program to define the differences between those tenants.  Over time the retention program can remove difficult tenants, reposition better tenants, and reduce your vacancy profile.  The tenant retention program is a significant business tool and point of difference for many retail leasing experts.

So all of these things will help you with the necessary momentum to improve your leasing activity; over time you can lift your tenancy outcomes.  Respect the differences in retail property leasing, and understand the specialised nature of lease negotiation.  Many commercial property agents have made a significant and very rewarding career from retail property.  You can too.

Selecting a Good Retail Leasing Expert

When you run a retail real estate agency specialising in retail leasing and property management, you really need a top agent that knows what retail property is all about.  The leasing of retail is very special; far more so than office or industrial property.  The selection of tenants will be made with due regard to the tenancy mix and the customer profiles that access the property.

It can take a leasing agent some years to fully understand the complexity of shopping centre performance and how tenants should be selected for a current or pending vacancy in the property.  The correct tenant selection will help boost the customer attraction of the property, and eventually the turnover or trade.

So what would you expect a retail leasing specialist to know or bring to you and your agency?  Here are some tips to help you:

  • Rents will vary from property to property.  This change requires knowledge and experience when it comes to gross and net rents, together with the incentives that are available to lease premises to new retail tenants in your local area.
  • Lease types together with the terms and conditions for a particular tenant will require negotiation based on the local leasing laws relating to retail property.  In many respects, retail leasing is more complex and the documentation behind the process is more rigid and
  • Tenant enquiry will change from location to location, however in retail property it is very much the case that the leasing agent has to get out into the business community and the other local shopping centres to talk to the existing tenants.  In this way they will find tenants that want to relocate, expand, or contract.  It is important to choose tenants that are at the top of their product or service offering.
  • New shopping centre projects and development timing will have impact on your current shopping centre and its future performance.  Always watch the supply and demand for retail space locally.  Any new leasing specialist should track these changes and the availability of retail space coming into the property market over the coming 2 years.
  • Property owners and new tenants that are looking for retail property are a unique breed unto themselves.  They require understanding and a leasing expert that can talk ‘retail’ from many different angles.
  • Franchise groups will require retail space to locate new businesses into.  That being said, franchises are a business model that has particular requirements of location and customer base.  It pays to have a leasing expert that understands how the franchises think and what they are looking for.
  • Outgoings costs will have a major impact on rental (gross and net) as well as a tenants occupancy costs.  Every retail property will have outgoings of a level that allows the property to operate efficiently and safely.  The important factor here is that the outgoings for a particular property should be of a level that is comparable to other properties locally of similar size and type.
  • Tenant mix and clustering are knowledge skills needed by a retail leasing expert.  When the tenant mix is correctly structured it builds a better market rental for the landlord and helps reduce the vacancy factor in the property.
  • Document knowledge and negotiation skills in retail property are quite unique when it comes to handling and working with small businesses.  A leasing expert should understand what variables can be used in a good lease negotiation for a shopping centre or retail property.

So, all of these things would indicate that a retail leasing expert is a special type of person.  Over time these skills can be learned; importantly the person chosen for the role has the right skill mix to take the role to the top of the industry locally.

Leasing Tips and Handover Strategies

When it comes to leasing a commercial or retail property, you will find that there are special things that should happen to keep control of the transaction and the final stages of property handover.  Eagerness produces errors and omissions from a leasing perspective.

The simple fact of the matter is that control helps us get the parties to the lease ‘across the line’.  For that very reason it pays to have a checklist approach to the leasing process and property handover.

When you get a lease negotiation underway, so many things can come into the transaction and divert the discussions and agreements.  Very commonly in the involvement of solicitors on behalf of the parties to the lease you will see that slow-down process start.

You are working for the client and they want a timely lease that is correctly executed and implemented. Always stay with the negotiation and the lease momentum to the very end.  If a solicitor has the papers on behalf of a client, chase-up the situation and see where things can go next.

Here is a checklist for the leasing of premises; it features some of the main things that are really important in leasing and a timely outcome.  You can add to the list based on your property type, and location.

  1. The correct lease documents should be prepared with accurate regard for the facts from the original lease negotiation.  Ensure that the client’s solicitor understands all of the facts and the unique elements of the property.
  2. Some lease documents are just part of the required paperwork for the lease occupancy.  At times there are other papers such as fit out agreements, disclosures, licences, and side agreements.  All of these should be correctly signed and in the order that is relative to local property laws and leasing situations.
  3. Any incentive agreements between the parties should be correctly documented and signed.
  4. Any plans and drawings that are part of the leasing agreement should be sourced and available for approvals.
  5. Any consultant reports relating to the transaction should be sourced.  Typically they are mechanical, electrical, structural, and base building.
  6. The permitted use for the premises should be clearly set and agreed between the parties.  That use will have impact on the design of the premises.
  7. Landlord approvals may be required before any building approvals are sought from the building and construction board or office.
  8. All monies to be paid under the lease should be taken at the time of handing over of all lease documents from the tenant.  Those monies should include bonds, guarantees, fit out contributions, and any other important financial commitments from the lease document.
  9. Do not under any circumstances hand over the keys to the premises until the landlord and their legal advisor have indicated that all papers and monies are correct and in order with both parties.  Importantly those documents should be signed by both parties.
  10. Document the condition of the premises before the tenant takes over.  This will be an important fact of record when it comes to the end of the lease.

When you create a lease handover checklist, you can keep the transaction on track to finality.  That then means a happy client and a good commission.

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.

Lease Types in Retail Property

blur of people in a shopping mall
Understand the right leases in your tenant mix and shopping centre.

When you list a property to sell or to lease you need to understand the type of lease that you are dealing with. There are definite differences in leases at all levels and hence a lease must be read fully before proceeding.

The better and more fully that you interpret a lease, the more professional you are and you appear to the people that you work with or serve. You can and should add strategic value in the client in every lease that you negotiate. A lease is not just a document to allow a tenant to occupy premises; it is a tactical cash flow that can attract or detract from the property.

The way that leases work will solidly impact on the property and its performance for the duration of the lease. As you deal with tenants or buyers for the property, the type of lease that applies will also impact on the negotiations. Let’s look at the main lease types and expand on the issues for you.

Gross Lease:

Under a gross lease the tenant pays a rent and the building owner will pay all building operating costs (also known as outgoings). This means that the lease itself will have rent review provisions that escalate the gross rent only.

In a lease of this type the landlord needs to know that they can maintain the building outgoings to predictable levels over the lease term. The levels of rent review escalations in the lease must be expected to cover or exceed the escalations in the level of outgoings over future years otherwise the landlord will loose money.

Gross leases are common in retail and office property. Your choice in using this rent and lease type should be balanced against the predicted levels of outgoings costs and future changes for the subject property. Obviously an older building will have steady escalations in outgoings above that of a building that is younger. As a building ages and deteriorates, the gross lease method becomes less attractive and more risky for the landlord.

Semi Gross Lease:

In this type of lease the landlord is setting a gross rent which is paid by the tenant and is reviewed over the term of the lease however the landlord also gets paid some regular money for outgoings under a specific calculation.

The landlord specifically recovers the escalation in outgoings above a nominated base year. This base year is selected at the start of the lease and is usually the last reconciled outgoings year prior to lease commencement, which is usually the previous financial year to the start of the lease (because it is fully reconciled and known as a set value).

As the new semi gross lease proceeds, the tenant has to pay the escalation of the outgoings above the nominated base year. For example, if in a lease the base year for outgoings purposes was set as the financial year 08/09 and the known level of outgoings for that year was $85m2 pa, then in the financial year 09/10 when the outgoings escalate to $97m2, the tenant will have to pay outgoings of $12m2pa. As the lease ages and in the financial year 12/13, the outgoings could be $108m2, and in that case the tenant will need to pay $23m2.

In this type of lease the base year is set and the outgoings ‘gap’ will likely increase significantly as the lease gets older. This type of lease is good for the landlord in that it protects the landlord against the escalation of the outgoings above the base year.

It is common in this type of lease for the base year of outgoings to be updated at the time of any market rent review. Market reviews in this type of lease would be done if the lease was lengthy (say over 3 or 4 years) and the landlord was concerned that they would be out of parity with the rent in the surrounding other properties of similar type. It is not necessary to do a market rent review at any particular time in a lease as the matter is negotiable at lease commencement, however be aware of the fact of re-setting the base for outgoings and the impact it will have on the landlord.

As a further interpretation of this type of lease you should look at the type of outgoings that are recovered in the calculation. It is not unusual for ‘lease savvy tenants’ such as the government to nominate the outgoings to which the base year escalations will apply. Naturally it is better for the landlord to recover the escalation in all outgoings in a building above the base year, however the government tenants are well known for limiting the calculation to rates and taxes escalations.

Clearly a lease is a product of a negotiation, but you need to understand what can be done and then get the best deal possible for your client.

Net leases:

The term net lease is firstly generic; hence you should be aware that there are 3 types of net leases within the category. So let’s look at them.

  • Net lease: In this lease the tenant pays some or all of the rates and taxes for the property or premises.
  • Net-Net lease: In this lease the tenant pays the rates and taxes as nominated in the ‘net lease’ method but they then also pay for insurance premiums for the property and premises.
  • Net-Net-Net lease: In this lease the tenant will pay for the rates and taxes, the insurance of the premises, and they will then also pay for repair and maintenance costs associated with the premises.

So what lease type is the best for the landlord? In most cases the Net-Net-Net Lease is the way to go, however it is a matter of if the tenant will accept and sign that type of lease. As a point of negotiation it would be wise in any Net Lease, or a Net-Net Lease to have a higher start rent for the landlord and better rent review provisions that offset the lesser outgoings recovery for the landlord.

Net-Net-Net leases are common on properties that are fully occupied by one tenant. This is method of lease structure is widespread in industrial property and office property.

 

Percentage lease:

This type of lease is more commonly seen in retail property as the calculation of rent is linked to the trading figures for the tenant. In most leases of this type the tenant firstly pays a fixed base rent that is geared to some rent review method, and then the tenant also pays additional rent that is calculated from their turnover or sales. As the tenant improves its trading, then the rent escalates.

An essential part of this lease structure is to force the tenant to give you accurate and regular audited turnover figures. The lease has to support and enforce the process for the landlord. Monthly turnover figures are the best way to go with the tenant providing the audited figures to the landlord by say the 7th of the next month. The landlord then charges the turnover rent to the tenant based on the audited figures.

This type of lease is also seen in new shopping centres as new tenants stabilize, in supermarkets for the same reasons, and in hotels or pubs. The basic strategy is to give the landlord some cash flow from the base rent from the start of the lease, and then to collect additional rent as the property and the tenancy becomes more successful in generating sales and customers.

Spell it out

In all leases, the recovery of rent and outgoings must be clearly set out to avoid debate and disagreement with the tenant. As you can now see, the selection of the lease type that you are to use on a property will significantly impact on the future for the landlord. It will also impact on any sales situation. It pays to know what is going on in the market regards lease and rent types so that you do lease deals that are similar to or better than the rest of the market. The right lease deals sell properties at better prices.