For landlords of commercial real estate properties working predominantly in retail, the demand for successful tenants is greater than ever before. Retail sales did see a growth of 3.8% in Q2 of 2022, but this figure is below the 5 year quarterly average. In addition, E-commerce and the after effects of the Covid-19 pandemic have drastically changed the way in which people shop, which has changed the wider retail landscape.
With a shrinking pool of retailers looking to enter into new leases, landlords are having to ensure their next retailer relationship is a success story, by guaranteeing they are identifying the right retailers for the right sites. On top of this, attracting these retailers, from national retail chains to mom and pop stores, requires greater ingenuity and more flexibility than it ever has before.
In this article, we will identify the key components of a healthy retail ecosystem, looking at the relationship between retail tenants and how striking a good balance is crucial to the profitability of a commercial real estate property. We will then look at how landlords can ensure they are identifying the right tenant mix, as well as ensuring their sites are as attractive as possible to these retailers.
The Retail Ecosystem
From stock portfolio management to the Amazon rainforest, diversification is one of the necessities of life. So too for commercial real estate, where tenants of different shapes and sizes are important to maintaining a healthy retail ecosystem. From the largest big box retailer to the smallest pop up store, a mix of tenants is crucial to maintaining revenue and attracting consumers to a shopping mall or retail site as a whole. But what are the different types of tenants? We’ve compiled some of the most common types below:
Retail Tenant Types
- Anchor Tenant – The tenant occupying the biggest space in a shopping mall or retail park, this tenant is usually a large national chain or department store, which has mass appeal to a cross section of visitors to the area. Anchor tenants usually have much longer leases than other tenants, normally from 10-20 years.
- Big Box Store – Similar to an Anchor Tenant, these stores have a large footprint and mass appeal to people from differing demographics. Big Box Stores tend to either provide general goods (Walmart, Target etc) or larger specialized goods like hardware and electronics.
- Destination Tenants – Primarily apparel brands, these tenants are popular or “on trend”, and as a result attract customers from a larger drive radius than other specialized tenants, which results in greater overall foot traffic to a shopping mall or retail area.
- Mom and Pop Stores – With consumers focusing more than ever on “shopping local”, Mom and Pop stores have seen a resurgence in recent years. Characterized as independently, and in some cases, family owned, these retailers tend to be more specialized than their Big Box counterparts, with an emphasis on filling a demand for a specific local area.
- National Tenants – These retailers are chains with stores across the country. Ranging from personal banking to pet stores and everything in between, they usually offer a specialized product or service.
- Regional Tenants – Like national tenants, these retailers specialize in a specific offering, but unlike their national counterparts, have locations in a smaller area. Usually at state level, they can sometimes serve a much wider geographic area.
- Local Tenants – Similar to Mom and Pop Stores, these retailers are smaller and operate in a specific community or area. Occasionally there are franchises, but again on a much smaller scale.
- Pop Up / Start Up Stores – Given the uncertainty of the retail landscape, landlords have had to produce creative solutions to unoccupied retail spaces, and Pop Up and Start Up retailers on flexible leases have often been the answer. Serving to provide income for the landlords, they also present an opportunity for online retailers to bring their merchandise into the physical world.
- Short Term/Holiday Tenants – Again serving as a stop gap between key tenants or as an expedited revenue stream, these tenants mostly comprise holiday specific retailers that have leases spanning the Christmas or Halloween periods.
Supporting the Tenant Selection Process
As a landlord, you will of course have an idea of what group of tenants listed above is best for a location within your property, and also what types of tenant will simply not work. How though, do you ensure you’re going after the right types of retailers? Does having a 3000sq ft site with excellent foot traffic next to a nationally recognized anchor tenant automatically ensure a successful leasing relationship? Is the corner unit in the strip mall that has never had a lease renewal, ever going to have a long lasting, successful tenant?
Historically, leasing decisions have been forged by relationship building and local area expertise as well as an instinct for a deal, qualities that remain as relevant as they ever have been. However, they have also been made without a level of data backed, evidence based framework that is readily available to landlords today. With advances in technology, landlords can now approach leasing conversations with the right retailers, and with the data to support their pitches. How easy is it for landlords to use data to ensure they are going after the right tenants though?
Identifying the Right Tenants
Data informs thousands of decisions we make a day, both in our personal and professional lives. Yet many in the commercial real estate industry are behind the curve in incorporating data into their businesses practices. A recent Deloitte report states that “Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate. Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.” How then can landlords use data to identify the right tenants? We’ve compiled a list of methods that can be put into practice.
Using Data to Find the Right Tenant
- Site Ranking – This analysis ranks a particular store’s performance on a local, regional and national level. High performing brands at other nearby locations can be approached to discuss opening locations at the proposed site, and tenancy renewal conversations can be informed with clear data based evidence on current tenants.
- Void Analysis – This analysis is used to identify a gap in the market for a particular retailer or brand. Data is used to demonstrate a chain’s success in an area that is close in proximity or size to the proposed site, which helps provide evidence for a successful lease if a branch is opened.
- Leakage Analysis – Using location or sales data, this analysis demonstrates where consumers go before and after they visit a proposed site. If a large proportion of these consumers visit a particular brand that is not on the proposed site, there is evidence to suggest that opening a store would benefit the brand and help consumer retention, serving the retail area as a whole.
- Co-tenancy Analysis – This type of analysis looks at brands that are commonly found in close proximity to a site’s existing tenants. If a commonly found brand is not present in the area, this tells us that targeting these tenants may be a smart move.
- Consumer Match – Using psychographic information that has been attributed to data sources such as location or sales information, this analysis ranks brands on how similar their customers are to the visitors of the proposed site. If there is a strong correlation between the customers of an existing tenant with a brand that does not currently have a lease with the existing site, this brand could be approached to open a location.
- Market Saturation Analysis – This analysis finds brands which are most likely to open a new store in the area. By identifying brands which have a store within a set radius from the proposed site, this analysis can be used to work out how likely they are to open another location based on their current store footprint.
Data is being used to improve the leasing process in ever more inventive ways. In particular, foot traffic analysis is at the forefront of providing the CRE industry with a holistic view of an area’s performance, providing information on what retailers should be a perfect fit for a location.
Find out more about how foot traffic can be used to power your business practices here.
Striking The Right Balance
Data based analysis is a powerful tool in identifying tenants for a site, providing a framework of evidence used to approach the right retailers. Utilized individually or combined to provide greater depth, the types of analysis listed above serve to form the basis of understanding not previously available to landlords. However, data can only take you so far, and traditional approaches to identifying tenants should still be employed.
Knowledge and pride in the local community, relationship building and trustworthiness have always been the foundation of the commercial landlord/tenant relationship, and continue to be so this day. Of course, identifying the right tenants is only half the battle. Attracting the right tenants is equally important, and given the changing retail landscape, landlords have had to change their approach.
How to Attract the Right Tenants
You’ve used data to identify the perfect tenant for your site, but what now? From enticing new tenants with non-traditional leasing agreements to sophisticated marketing, landlords have never had to work harder to ensure their retail space for lease is occupied by successful tenants.
Promoting Your Property
Alongside targeting specific retailers to fill leases on a property, it is always worth investing in producing marketing materials. Acting as a lead generator and nurturer, traditional marketing materials continue to serve a purpose in leasing a property. With greater competition for tenants than ever before though, commercial real estate landlords need to come up with ever more sophisticated and engaging content to set themselves apart from the competition.
Video has always been a more engaging medium than imagery, and this adage is more true now than it ever has been. In the case of social media, video content gets 21.2% more engagement than images. As the lines between online personal and professional personas continue to blur, more and more of what is true online can be applied to our professional lives, and the success of video content is no exception.
Promotional video content serves to showcase a landlord’s retail space to a lead, as well as the the wider property, and the area in which it’s located. However, with the advent of VR and 360 technology, sophisticated walkthroughs of properties place prospective tenants into their idealized retail space, allowing them to imagine their future store fronts with greater clarity.
Brochures can be so much more than building specifications, ceiling heights and square footage. High quality photography, local area demographic information and annual footfall information gathered from location data analysis providers add a layer of depth and insights to your materials that can help expedite leasing discussions.
Online versions of your brochure or leaflet are a must, as bigger retailers may want to get as much information as possible before coming to the location in person. Most importantly though, ensure that the contact information listed on both online and printed versions are up to date, and that you are always reachable on the contact telephone number or email address listed.
Sometimes the old ways work the best, and this remains true of printed materials. Traditional signage serves to advertise availability on a local level, and works best if you are primarily interested in attracting local, regional or Mom and Pop retailers, as these are the level of retailers that will have eyes on physical advertising outside a property.
Usually the style of these signs are limited to agency templates, but if you can influence how the finished product looks, you should take the opportunity. Again, ensure all contact information is accurate.
Often the first point of contact with prospective tenants, the website should be the primary focus of your marketing approach, combining all of the previous aspects into a clearly laid out and navigable format. By showcasing your video content, brochure images and copy and contact information in one place, leads have all the information they need to get in touch with and start making enquiries about leasing your property. For inspiration from some of the best and brightest Commercial Real Estate websites, take a look at this list.
Of course these materials take money and time to produce, and although you will see results if properly applied, the outlay can be prohibitive to some landlords. If you don’t have the ability to do this yourself, you can of course enlist the help of a landlord representative for help in this, and other, parts of the leasing process.
What is a Landlord Representative?
On balance, the most efficient way to ensure your property is leased as quickly as possible is to hire a landlord representative. Just as commercial real estate tenant representation looks to ensure retailers get the most attractive leases at the most suitable locations, landlord representatives work to support landlords sign leases with the right tenants.
There are fees when working with a commercial real estate broker which need to be factored into your thinking, but payment won’t be required until they complete the full leasing process. Even then, it’s most common for 50% of fees to be collected when the tenant pays their deposit, and the rest to be paid once the tenant starts paying rent.
From identifying the perfect tenant to promoting your property, and finally supporting with lease agreements, commercial real estate landlord representatives can provide full or partial support with the entire leasing process. They know the industry, they know the local area, and most importantly, allow you the freedom to keep running your business.
Making the Right Call
Any commercial real estate broker worth their salt should have at least some degree of data driving their decision making, but as outlined previously, sadly this is not always the case. When entering into a professional relationship with a CRE brokerage firm, shop around until you find a landlord representative that can provide a framework of analysis based on the principles outlined earlier in this article.
While local area knowledge and relationship building are still key to being a successful broker, they no longer guarantee a successful tenant relationship. Make sure your broker has a good understanding of what makes a retailer the right choice.
Less Effort, but Less Control
One of the major benefits of enlisting a brokerage firm to help you to rent commercial property is that they have whole marketing teams dedicated to promoting your listing. The time it takes to produce signage, websites, brochures and everything in between, can be a daunting prospect for some landlords. Landlord representative firms can do all of this work for you, allowing you the time to focus on managing your property.
There are downsides to this arrangement though. Brokerage firms have their own templates for collateral, which means you have less of a say in how your properties are listed. Additionally, brokerage firms work on many listings at the same time, so there may not be the same level of attention on your property as you might hope for.
Perhaps the most attractive feature of the service landlord representative brokerage firms can provide is their support with contracts between landlords and tenants. Unless your broker has a law degree, they cannot provide you with legal advice or produce a contract themselves. However, they will either have an in-house legal team, or otherwise work closely with a local legal firm who will draw up the heads of terms and the contract. Even the most experienced of landlords will need their contracts drawn up by a third party. Landlord representatives help alleviate the headache caused by the production, amending and chasing required to complete a contract.
The commercial real estate landscape has become increasingly competitive as the amount of physical world retailers has reduced since the COVID-19 pandemic and its afterglow. As a result, landlords have had to come up with ever more attractive contracts to guarantee tenancies, and enter into relationships with non-traditional retailers in order to guarantee rental income on properties.
21st Century Leases
A post pandemic nervousness from retailers can still be seen in the commercial real estate industry. With wage growth being outpaced by inflation rates of 9.1% in Q2 in 2022, and rental amounts on commercial property increasing 2.4% year on year, caution from retailers looking to rent commercial property is understandable. To help alleviate these concerns, landlords need to look at relaxing the constraints of their contracts, and look to offer leases to new types of tenants.
Flexible Tenancy Agreements
When entering into a lease agreement with a retailer, in particular one a landlord hasn’t worked with before, a level of flexibility in the contract has always been expected. Given the increasing lack of certainty around store sales performance though, more and more retailers require guarantees from landlords that they will not be forced to pay rent on a property that is no longer bringing in revenue.
As a result, retailers and their representatives may look for clauses to be added to contracts to make them more appealing. It serves in the interests of both the tenant and the landlord to ensure that both parties feel comfortable with the agreement reached, which helps in fostering a healthy and long lasting tenant landlord relationship.
Incentivising retailers to enter into leases with rent free periods in the early days of the agreement and allowing break clauses and limiting contract legalese for first time tenants give retailers a level of reassurance in a landlord, whilst still guaranteeing steady income. Flexibility also allows landlords to cut their losses if a tenant is simply not bringing in the revenue expected, allowing them to move on to the next, hopefully more fruitful partnership.
A New Breed of Retailers
Changes in the landscape of physical world retailers may have been accelerated by the COVID-19 pandemic, but were present prior to 2020. Consumer buying behavior and the prominence of e-commerce has seen less of a demand for brick and mortar stores, with fewer new retailers looking to open physical storefronts in favor of the website and order fulfillment model. Retail space absorption fell by 40% quarter over quarter in Q2 of 2022, with most leases being taken by established retailers.
A new type of retailer is showing signs of popularity though, as consumer focus shifting to buying local and supporting independent retailers. Landlords need to ensure those new players entering the game are afforded the same opportunities for success as their more established competition. Flexibility in leasing plays a key role providing equality in opportunity and support to up and coming retail entrepreneurs.
Often, start up and pop up retailers are not experts in commercial real estate lease agreements, and should therefore be aided as much as possible by their new landlord. ICSC advises that “If you get too fancy with the lease, your would-be new tenant is likely to burn through its construction budget on legal fees and end up with a lease it doesn’t like or understand.” Support where possible is key to not souring a professional relationship before it’s even begun.
With this lack of familiarity with the leasing process, some may find 3-5 year leases and months long signing processes intimidating, and may require a gentler approach. From ICSC again “The tenant, typically not working through a lawyer, can use a simplified form [of tenancy]. These so-called LD (leasing department) leases are free of much of the standard legalese and require only three to five days to complete.”
As we mentioned in the first section of this article, the Retail Ecosystem requires variety in order to survive. Landlords may have doubts about being so lenient with an unproven tenant, but small and independent tenants are as valuable to not just the ecosystem of a retail property, but to the wider retail community as a whole. And who knows, that seedling Mom and Pop tenant could grow up to be Giant Redwood Destination Tenant, bringing foot traffic and revenue to the property as a whole.
Technology to Guarantee Success
The most surefire way of ensuring that any new tenant, from first time retailers to established nationwide Big Box retailers, are success stories, is by identifying the best fits through data. We know that we have more access to information than ever before, but sometimes we forget to use it to our advantage, especially in industries that have never relied on it in the past. By harnessing the power of this information to make the right choices in who to target to occupy a commercial property for rent, landlords stand a much better chance of securing a tenant who will ensure guaranteed income, as well as revenue for the retailer. Data can help prove this by telling the story of consumer behavior and the decisions consumers make.
Get in touch to see how data can help you make the right choices.