When it comes to leasing a retail property, the leasing specialist must be a real expert in the retail property type and the strategies behind tenant selection and tenant mix. In a retail property today, it is not simply a matter of finding a tenant and creating a lease; the right tenant must be found for each and every property. Many variables come into consideration.
A well selected tenant for a retail property will do a lot for the factors of property function and performance including:
- Underpinning market rental for the landlord and as an investment property
- Minimise vacancies in the property for the long term
- Build on the success of tenants in the property so that the investment property can be expanded or sold on at a reasonable capital gain
Given all of these above factors, a retail leasing ‘expert’ is a special person that understands the leasing process and retail property performance to a high level.
Here are some factors that can help you in gaining this level of retail property expertise:
- Retail leases are documents that are built around strategy of rent, lease terms, and tenant mix. In many respects, you do not want one lease to negatively impact the occupancy of tenants around it and in the same property. That is why knowledge of tenancy mix becomes so important.
- Rent levels and lease incentives will change throughout the year given the overall location and the property type. Monitor these changes and watch the rental levels.
- The levels of tenant enquiry will change during the year. Some of that enquiry is quite seasonal and should be identified as that. It may be that a property should be leased at a particular time of year as opposed to a time when the market may be slower given sale or market trends.
- In retail property you should watch for other property developments that are soon to be coming on the market. They can have a major impact on rental or incentives that are being offered. In many respects those other properties will be attracting some of your tenants to relocate.
- Franchise tenants are becoming an important part of many retail shopping centres and the particular tenant mix. In many respects, particular franchise tenants will be very desirable for certain retail properties. Get to know the franchise tenancy groups that operate in your area or that could require new premises in your area.
- Anchor tenants are an essential part of the structure of a major shopping center. They also have a role to play when it comes to smaller retail shopping centers and neighborhood centers. The selection of the anchor tenant will be based on the demographics of the local customers visiting the property.
- Tenancy mix strategy will vary from property to property. The age of the property, the existing specialty tenants, and the intentions of the landlord will all have impact on the tenancy mix. In many respects, the proximity of one tenant to another in the same property could have major impact on the stability of the market rental, the sales for some of the tenants, and the visitations of the customers. Clustering is a factor that applies when it comes to retail tenancy mix. Some tenants in a cluster can enhance the sales of nearby tenancies. That is how strategy and tenancy placement comes to the fore.
Retail property experts and leasing specialists tend to understand the leasing process very well and can analyse the performance of the property from that.
When it comes to the leasing of commercial property, you as the commercial real estate agent really do need to understand the trends of the local area. It really does not matter if you sell, lease, or manage property as the main part of your job; you still need to understand how to lease a property and how that lease can improve the sale or the property performance.
The clients that you work with will expect you to bring significant local market knowledge to their needs and opportunities. That local knowledge will also need to be very apparent in your sales pitch and presentation; you want the client to listen to you.
It is a fact that many agents are far too general when it comes to the initial presentation to the client of the available services and solutions for their property. Being specific to the property helps the clients really understand the relevance that you bring to the property requirement.
Leasing is one of those disciplines that will eventually create a property sale or a property management opportunity. That being said, a commercial or retail leasing specialist should be suitably versatile to talk about sales opportunity and property management strategies as well. One commission opportunity will turn into several over time.
For a commercial real estate agent to be of any relevance to the client that they serve, they will need to have a toolbox of strategies to implement for any particular client or their particular property. Those strategies should not be generic, because the client is likely to be seeing a few agents before they make a selection on what agent should get their listing.
Here are some factors for commercial and retail property agents to optimize as part of their services and solutions for clients:
- Get to know the rentals in the local area as they apply to the different property types. There are differences between gross and net rental when it comes to different property locations and property types. In some leasing circumstances you may use a net rental strategy, whilst in others you may use a gross rental strategy. Either of these choices will have impact on the rent review process that you negotiate for the particular lease.
- In any particular property market is very common to have a variety of incentives available to new tenants. The size and type of that incentive will change from time to time based on the supply and demand of premises locally. When there is little vacant space available for new tenants to occupy, it is likely that the incentive will diminish or even disappear. That will only remain the case when demand for premises exceeds supply. Over time you will see new property come into the market through fresh new property developments; the leasing leverage that each landlord creates in those circumstances will be that of an incentive. As the local property expert, you need to know the incentives that are both available and sensible for any particular property that you could be leasing. Compare those incentives to other properties nearby and in the general property market. Offer the landlord some alternatives when it comes to those incentives and how they match the needs of that tenant enquiry that you know exists currently.
- When it comes to establishing a new lease, it is best to have some regard for the existing tenants in the current property and their proximity to the current vacancy. What you want to do here is spread the risk of any vacancies occurring in adjacent premises. In other words, you want to minimize the chance of multiple vacancies occurring at the end of lease terms at about the same time. The only reason you would have any adjacent vacancies occurring would be in the circumstances where a renovation or relocation strategy was required for property improvement.
- The operating costs for the property (the outgoings) that appear in any lease negotiation should be acceptably similar to those which apply in competing properties. If your property outgoings levels are too high, then it is likely that the vacancy will remain difficult to lease. On this basis it pays to understand the levels and types of outgoings that are available and charged in competing properties in your area. There is a large difference between the outgoings or operating costs charged for a retail property, and industrial property, and an office property. Generally speaking the outgoings for a retail property are far higher than those that would apply to office property. Similarly, an industrial property is at the bottom end of the outgoings scale in occupancy cost structure.
Get to know your local property market comprehensively and thoroughly. Properties will come and go in the area from time to time, and some rental or lease transactions will occur.
Get to know the actual rents that are achieved from the particular lease deals as they are the rents that are acceptable to the enquiring parties in today’s market. As part of this process, stay abreast of the future new property developments that are coming into your region and that could have an impact on the supply and demand process.
When it comes to leasing commercial or retail property, the landlords that we work for can be too fixated on the start rent as part of the lease agreement and lease negotiation. If they are holding the property for a number of years, there are some other factors in the lease that are perhaps much more important to the lease cash flow.
The start rent of a lease is only of great concern if the property is soon to be re-valued for finance or to be taken to sale in the near future. In that case the passing rent will be capitalised and a value for the property will be set.
The fact of the matter is that the landlord wants a tenant first and foremost. In this tougher property market the landlord cannot be too focused on the start rent (within reason). As long as they get a rent that is relative to market and not aggressively high, they can pick up the growth in rental through other means over the lease term. That’s where you being a lease specialist will be of great relevance to the client. You should be the strategist to make this happen.
Here are some ideas to help with helping the landlords that you act for, get more rent.
- The start rent should be set with reference to the local market and the comparable properties that are available for occupancy. You have to attract a tenant, so the rent has to be ‘attractive’ to encourage property inspections and lease offers.
- Rent review profiles can improve the rent. Importantly you should select the rent reviews that give the landlord a realistic and sustainable rental increase. There is no point in pushing a tenant to business volatility with a high rent. When the property market is soft, tenant stability is more important than rental increase.
- Face rent and effective rent are two different things. The difference between them will be created by the use of an incentive in the lease deal. The face rent will allow the landlord to get back the cost of the incentive. The recovery should be structured into the lease rental and the rent review process. You can calculate the difference between the rentals by a calculation and an assumption of Net Present Value over the lease term.
- Car parking can be considered a separate rental. I know that some lease deals include the car parking in the base lease rent; whilst that is fine for some landlords, do not overlook the advantage of setting a rent on the car parks that are provided to the tenant. Any car parking rental could be documented on a licence or similar separate document to the lease.
- Naming rights and signage in or on a property should not be provided ‘free’. If the business wants to put their business name on a property, consider the issue of rental for that signage being positioned.
- Storage rental should be charged when possible. On-site storage for a tenant is a business advantage. If you give the tenant a special area where they can store things, determine a rental for that and set up a separate licence agreement.
- The provision of roof top space for an antenna will be another opportunity for a rental. You can add to that rental a cabling space rental for the distance that the tenant takes in dropping a cable down the building riser to their tenancy.
I know that some of you may find some of these things difficult to negotiate in all leases; I also know that some lease deals are special and a base rental ‘covers everything’. That being said, please understand that it is the job of the leasing agent to get the best ‘realistic rent’ for the landlord that helps them improve rent and also stabilise occupancy for the long term. You are the lease strategist.
It is an interesting fact that most property solicitors acting on behalf of a client in a leasing situation will never really visit the subject property to understand the factors of occupancy and property performance. They simply create a lease based on previous standards and their experience as a property solicitor.
This is not to say that solicitors don’t know what they’re doing, but it is to suggest that some solicitors need to take more time in understanding the properties that the client owns. Every property should be regarded as unique and different. The factors of occupancy that apply to each tenancy can be quite specific.
Here are some factors that would apply to a standard lease situation:
- Decisions need to be made regards the rental type to be used in the lease. The rental type could be either gross or net, and that will have impact on the recovery of outgoings for the landlord.
- The the amount and recovery of outgoings in the property will change over time given the age of the premises and the value of the property. The lease document needs to allow for these two factors.
- Each vacant space will have unique factors of presentation and remediation. At the end of the lease there will also be issues relating to the making good of the premises. The make good clause should specifically talk to the factors that the particular tenancy and occupancy create.
- In every lease occupancy, careful consideration should be given to the time frames that apply to negotiating rent reviews and lease options. Both of these issues create critical dates that will need action and response by the landlord and the tenant. Failure to act and respond by those critical dates can expose either of the parties to unnecessary risk and obligations.
- The duration of a lease will have a direct relation to the cash flow for the landlord. In a property with multiple tenancies, there can be a potential threat of vacancies occurring at the same time in close proximity to each other. Excessive vacancy in the one property and at the same time, can frustrate the leasing process, increase vacancy downtime, and increase the financial impact of incentive on the landlord.
- Incentives are usually required for the leasing of premises to new tenants. That being said, the landlord needs to discuss with their solicitor the best types of incentive that will suit the property and the investment over time.
So there are a number of factors to consider when it comes to leasing vacant premises. On that basis the landlord should be encouraged to select the correct solicitor who has the time to investigate the attributes and pressures that apply to each particular property. In that way the landlord will get a lease that clearly matches the investment cycle and the cash flow that they require. This will also help the commercial property agent when it comes to lease negotiation with potential new tenants.