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Worth the Money – Reassuring Retailers on High Rents

Worth the Money – Reassuring Retailers on High Rents

November 16, 2022
Void Analysis Needs Fixing

 

Rents are through the roof for retailers. High interest rates and low vacancies are driving rents into uncharted territory and for retailers, at the moment signing a lease on a property isn’t as attractive a proposition as it was a few years ago. Landlords and their representatives have got to work harder than ever to convince retailers that their vacant property is a perfect fit for them, but can no longer rely on practices they’ve used in the past to get the job done. Retailers demand a body of evidence on why a site is right for them before they’ll even pick up the phone to start a leasing call, and some landlords just don’t have the tools they need to get the job done. If you’re relying on outdated void analysis practices and can’t work out why your vacancy isn’t filled yet, Proptech is here to help.

 

Retail Vacancies at an All Time Low

 

At first glance, the outlook for brick and mortar retailers looks very promising. Nationwide, vacancies are back at pre-pandemic levels of 4.6%. New deals are being signed at an impressive rate too, with over 250 million square feet of retail space agreed in the past 12 months. However, scratch beneath the surface and it isn’t quite as good as it seems. 

New retail space delivery is stagnant against retail space demolition, with most stores being taken before construction has even begun. Combined with the fact more and more existing retail space is being repurposed as order fulfillment centers and other non-traditional uses for brick and mortar spaces, retail space is at a premium. Unsurprisingly, scarcity of available space is pushing rents. The average rent growth across the last 10 years is at 27.7%, with some desirable cities like Nashville seeing a staggering 63% increase in that same time.

With less space available and higher rents on the remaining vacant properties, landlords need to provide retailers with reassurance that signing a lease is a smart move. Although chain closures are down and shoppers are returning to stores, the pain felt during the pandemic lives long in the collective memory. Skittish retailers need cold hard facts before putting pen to paper, and one way of providing these facts has been void analysis, but with margins for error decreasing as availability shrinks and rents rise, does this go far enough anymore?

 

An Outdated Approach to Void Analysis

 

Historically, void analysis has relied on two factors to provide insights; demographic and geographic data. In other words, where is the site, what sort of retailers are around that site, and who lives near the site. 

Geographic analysis boils down to one simple question; Is there another branch of this chain, or otherwise a number of direct competitors, within a set radius of the proposed location? If not, you can confidently tell retailers it makes sense that there is the need for a new branch at this site, as potential visitors to this location will not be cannibalizing the performance of another store, or otherwise there is a hole not being filled by one of their competitors. 

Demographics are used to provide retailers with an understanding of who lives within a set radius of the proposed site, so that they can use that information to work out if that is a good match with their key customer base. The retailer can use these figures to work out whether this demographic is underserved in this area, and may decide to open up a store to serve them.

While both demographic and geographic analyses are good starting points when looking to fill a vacant property, they fall short of providing the level of certainty that a retailer needs to sign a lease. Take demographics for instance. Just because the data points to a higher percentage of 18-40 year old males living near a vacant property, doesn’t mean that opening a sporting goods store would automatically be a home run. This type of analysis is based too much on assumptions; that as well as living in this area, this demographic also works, shops and spends all their free time in this one neighborhood. Just because you build it, it doesn’t necessarily mean they will come. 

 

The Rise of Proptech 

 

As rents rise and vacant lots fall, retailers can no longer afford to risk business decisions based on assumptions. The need for thorough, data based evidence when looking to pull the trigger on a leasing decision, both on the retailer and property owner sides, have led to a wave of innovation in AI and Machine Learning use in commercial real estate deals. Paired with a host of softwares designed to make the leasing process as easy as possible, Proptech tools aid in minimizing risk, and maximizing profits.

Data underpins every decision we make in life, so it should come as no surprise that the same can be said for commercial real estate deals. Every part of the commercial real estate ecosphere is now supported by data backed analysis in an easy to use SaaS platform. From construction progress tools to vast databases of real estate data and even communication tools to help retailers and landlords speed through the deal, cutting edge technology is helping to reduce waste as well as the time spent to get retailers to sign deals. The problem remains though, how do retailers get the assurances they need that the property they’re being pitched is right for them? 

 

New Approaches to Void Analysis are Needed

 

As touched on before, traditional ways of approaching void analysis simply don’t cut it anymore. Almost every part of the leasing journey has been streamlined and improved by data, with sophisticated AI underpinning the approach. The same has to be applied when providing a retailer with a body of evidence that the site you’re proposing to them is going to be the right choice.

A recent report from The Wall Street Journal based on figures provided by Cushman & Wakefield shows that US retail vacancy fell 6.1% in the last quarter, but that has resulted in a 16% increase in asking rents for retail spaces from this time 5 years ago. This increase in rent is being driven by factors like competition for ever decreasing traditional brick and mortar space and rising interest rates, as outlined earlier. This has given landlords license to charge more for increasingly valued and valuable assets, but does have the knock on effect proving to retailers that your site is worth the investment. 

In a more innocent, less data driven age, an initial leasing conversation may have been more simplistic, with data provided only based on looking at proximity to other stores and potentially outdated and irrelevant census data. This level of analysis is far from cutting edge stuff, and today most of the data can be obtained with a spare half an hour and a search engine. Retailers demand more, which thanks to AI techniques and new ways of approaching data, landlords can now provide insights on the metrics that actually matter.

 

What Factors Indicate Retail Success

 

Retailers demand more to convince them to sign a new lease, and landlords have never been in a better position to tell a compelling enough story about their property to do so. Advancements in AI have improved the capacity for Proptech companies to expand the depth and breadth of the insights they can offer to landlords, providing a number of different data points, as well as new ways of analyzing their findings. 

Hopefully the point has been made clear by this point, but it bears repeating, outmoded approaches to void analysis are simply not enough for retailers any more. Regional, national and global chains have a host of metrics to be reached and checkboxes that need to be ticked before they’ll even consider opening leasing conversations. Landlords need to start providing insights to retailers on their own terms.  

 

How Retailers see a Good Deal

 

Proptech companies offering void analysis have started to provide retailers with the data signals that matter to them, here are a few examples.

Leakage Analysis

Retail leakage occurs when high demand for a good or service does not match the supply in an area, and shoppers go elsewhere to find a supply elsewhere. If a retailer gets assurances that there is high demand in the proposed area that they can supply, then landlords should be able to find it easier to demonstrate that signing a lease should benefit both parties.

Co-tenancy

Retailers can insist on co-tenancy clauses in their contracts, and will expect rent reductions if key retailers aren’t present in the shopping mall, strip mall or trade area. Even if retailers do not have specific contractual needs for this, they will almost certainly have data showing that their stores perform well when located near specific big name retailers. If landlords can show not only that they have an understanding of who these specific retailers are, but can also show that these retailers are nearby, this should help leasing discussions. 

Cross Shopping Analysis

Similar to looking at typical co-tenancies for a proposed retailer, cross shopping looks at the retailers that benefit from being near your anchor tenant. If your proposed retailer is on this list, you have the proof to demonstrate how fruitful a lease at your property would be.

In-depth Consumer Analysis

Demographic insights don’t go far enough, as they only tell retailers who live near a location. Consumer analysis goes further, and shows retailers the people actively engaged with an area based on psychographic data. This data goes one step further than traditional demographic data, and doesn’t just identify people by their age, gender, race etc. Instead, it shows who they are as people, what drives their buying decisions, what stage of life they’re in or even want to be in. If you can show a retailer that their key customer base work, shop or live around the proposed site, they’ll be ready to sign 

Market Expansion

Developing on from geographic analysis, market expansion seeks to provide a more holistic answer to the question of whether a retailer should be looking to open a store at your location. As well as looking at the proximity of other branches and local competitors, retailers need to know if your site is a good fit practically. Does your site match the square footage of their other stores? Do they usually open locations in a site that looks like yours, in the sort of area your site is located? If the site seems like a good match, you can target the retailer knowing they should respond positively. 

These different types of insights can also be used on their own, by combining two or three, or as a whole package, but all do a lot more heavy lifting than old-fashioned takes on void analysis. What is most important though, is that retailers can now choose the data points that are relevant to them, and landlords can save themselves time and money by only speaking to the prospects that the data shows their location will be great for.

 

A New Breed of Proptech

 

Solutions with foundations in technology are revolutionizing the property industry. With an expected CAGR of 16.8% during the next 10 years, and data and AI being applied to more and more steps of the leasing journey, using evidence to support a leasing conversation seems like a no brainer. By not only providing data points to a potential tenant that are important to them, but also demonstrating beyond doubt that your location is a perfect fit for them based on how they define success, Proptech tools that offer enhanced void analysis solutions are an important weapon in the arsenal of any leasing team. 

Retailers need to be convinced that the rents they are being charged are going to be worth paying, it doesn’t stand to reason that landlords can get by on the force of their charm any longer. There is always going to be a place for charm, but when combined with data based evidence that Proptech void analysis solutions provide, the person on the other end of the meeting room table isn’t going to stand a chance. 

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