In a commercial or retail property today, it is the tenants that provide the backbone and the stability to income and rental performance. On that basis, you really do need to keep your tenants well in control given the prevailing market conditions and the current tenancy mix.
It is notable that a retail property can be highly volatile when it comes to tenant interaction and occupancy. Essentially all retail tenants are essentially small business people that rely on the success of the property and the overall tenancy mix to provide an opportunity for sales growth.
The tenants in a retail property will usually talk between each other on a regular basis. They therefore share information and perceptions relating to the property, the property manager, and the landlord. I go back to the point, that you must not let your tenants get out of control. Encourage good communications and build solid relationships with all of your tenants.
Here are some rules to apply to the tenant communication and connection process in commercial and retail property today:
- The tenant will be assessing their business performance continually during the year and the lease term. This then says that you should meet with your tenants on a monthly basis. This will help you when it comes to understanding shifts and changes relating to their business, customer base, or sales. If you identify any problems early, you can make the necessary adjustments to occupancy or leasing strategy.
- In a large property, it is likely that you will have one or more anchor tenants as part of the tenancy mix. The anchor tenants will usually be in occupancy for the long term with a lease document that extends over a number of years; in most cases the lease for an anchor tenant will be in excess of 10 years and will have options for lengthy renewal terms. Stay close to your anchor tenants so that you can understand how they are integrating into the overall property and any associated specialty tenants. The success of the anchor tenant will have some flow through to the specialty tenants.
- Most leases will have provisions for rent reviews and options as part of occupancy. The critical dates that apply to those lease situations should be carefully watched. Any rent review or lease renewal inside the next 12 months should be negotiated as early as possible. This then will remove the volatility from the property for the landlord.
- Every meeting or conversation with a tenant should be documented as quickly as possible. Whilst a simple situation or discussion today with a tenant may seem unimportant, it is quite common to have more complex issues arise in the future that started from some simple discussion or telephone conversation.
Get to know your tenants as part of the services that you provide for your client the landlord. In this way you can help the client understand the predictable changes that you can see with the tenancy mix and the lease profiles.
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 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.