In commercial real estate leasing today, the first tenant that you find to fill a vacancy in a property may not be the best tenant for the investment over the long term.
Ultimately you need to consider first and foremost the future of the property, the improvements within the asset, and the investment targets of the client. You can then choose the best tenant by type and market the property accordingly.
The marketing strategy behind the leasing requirement will allow you to drill down into the factors of attraction that apply to the vacancy. You want to attract the best tenants for the location.
So you will need some information to assess about the property, the client, and the local area. The depth and the strength of your research will help you match your services to the requirements of the client and the property
Before you lease the property and the vacancy understand the client first and foremost. The client as the landlord owning the property will have certain targets to recognize including the following:
How long do they wish to hold the asset?
What are the requirements of cash flow from the lease?
Are there other tenants within the property to support the rental return?
In any medium to large property, you will need to review the lease expiry dates, rental structures, and occupancy pressures before you lease any vacancy to a new tenant.
Are there factors of renovation that need to be incorporated into the tenant mix and the lease structure?
Are there factors of risk that need to be incorporated into the property performance plan and the overall leasing strategy?
Has the client diversified their property portfolio across a number of different locations? Diversity brings with it other strategic factors to consider.
In answering all of these questions, you will have a reasonable idea of the best tenant by type and by location. Understand how the tenant will fit into the tenancy mix to strengthen the overall property profile and income return.
Subject to all of the previous questions raised, you can drill down into the best types of tenants that suit the asset and the investment targets of the client. A good tenant for an investment property will usually bring the following factors to the asset:
Stability – Every tenant should be assessed for stability before you commit to lease negotiations. You will need to review their business history, other locations of occupancy, and talk to the key people.
Income – Look at the levels of rental that apply in the local area. Will you be leasing the property on a gross or a net rental basis? What are the market rentals that apply respectively? How can you improve the income over time through rent review structures and strategies? How long should the lease be? All of these questions will impact the income for the asset. Answer the questions before you negotiate with the tenant.
Profile – Some tenants will bring with them a business profile that is attractive to the property. A business brand or a business profile can bring a marketing advantage to the property. Some franchise brands also achieve the same enhancement.
Taking these three elements into account you can do something with your lease negotiation. You can give the landlord some solid reasons to negotiate effectively and directly with the chosen tenant. Most landlords will cooperate when it comes to attracting a new tenant in a stable and strong lease arrangement.
A retail property and particularly a shopping centre is a special asset in many different ways. It takes skill and knowledge to make something of property performance.
There are numerous things to put in the retail ‘balance’. Special strategies are required. Are you up to the retail challenge?
Understand the retail facts
So what are the variables that make this so challenging? Consider these for starters:
Tenants struggling to make sales – Some tenants will always struggle given that they may not be offering the right products or services. They may also be inexperienced in retail trade and sales. If you have a difficult tenant in a property it is perhaps better to move them on at the end of their lease (assuming that they can trade until the end of lease)
A tenant mix that just doesn’t work for one reason or another – A poor group of tenants with weaknesses will quickly slow customer interest and repeat visits. That weakness then leads to sales decline. You must quickly fix a retail shopping centre tenant mix if you have issues that are weaknesses and impacting property performance.
Vacancies currently in the property or those that can be expected – When you have empty shops to resolve, ensure that you are coming up with immediate strategies such as creating short term occupancy and placing marketing material in the empty space. Customers will see the vacancy so build some ‘vibrancy’ into the empty space.
Market rentals and strategies for the property – Understand what the rents are doing for the property type in your region. How does your property compare?
Outgoings recovery from the tenants – The lease documentation will be important when it comes to outgoings strategies and recoveries. The rent types used in the property will also have an impact.
Customers and their spending patterns – At different times of the year the sales results change for the retail sector. Watch the process and how it is impacting your tenant mix.
Lease documentation that is complex and critical to occupation – Understand all of the leases in the property. Some will be better than others.
Landlord net income requirements – The landlord will have expectations when it comes to the net income they achieve. The expenditure in the property will place pressures on cash flow. Understand how those things work in your retail property.
Retail sales patterns for the region – Always look at shopping and sales trends for the region. Understand if your property is being pressured by other properties locally. Understand why that is the case and try to fix the weakness.
The configuration and presentation of the property – It is a fact that any retail property will be higher in upkeep so costs and strategies will be required. The presentation and functionality of the property has to be at the standards expected by customers. In that way the customers can keep coming back to the shopping centre. A retail property will soon be in decline if maintenance and presentational factors and lacking.
Every one of these issues can demand specific focus and effort from you as the specialist broker to bring about a resolve for all concerned.
In retail property and shopping centre performance today, the tenant mix and the income created from the tenants in occupancy needs to be shaped and improved over time. That is where ‘tenanting mix orchestration’ is a useful skill to learn and to feed into the property investment strategy.
The suggestion here is that the tenant mix can be shaped and improved. That is certainly the case in retail property performance. That is your job. The landlord will benefit greatly over time by a well-considered and controlled tenant mix.
Every lease and every tenant in occupancy should be looked at in balance with the surrounding tenants, the shopper clusters, and the customer profiles. The terms and conditions of each individual lease should be negotiated to standards that match the investment targets of the landlord.
Anchor tenants – You have to start your assessment around the stability and business activities of the anchor tenants. Look at the lease conditions that apply to each and every anchor tenant in the property. How long are they in occupancy? What are the terms and conditions that apply to their occupancy? How can they integrate their business activities into the success of the overall property?
Customer profile – You can’t move your property to another location. On that basis your customer demographic will be specific to certain incomes, employment, and family profiles. Understand your customer base and how those customers like to shop locally. You may need to undertake a marketing study through the local area to get the most recent and up to date information about customer activity and or future needs. When you understand the customer, you can set the strategies in place for the ideal tenant mix and property profile. You may also be pulling in the customers from outside of the area through tourism and transient people.
Property design – Every property will have factors are designed to understand and integrate into the tenancy plan. Entrance points, common areas, congregation points, and transport drop off points all influence foot traffic and potential retail sales. The tenancy mix should be designed for customer interaction and sales improvement. That base strategy requires you to put the right tenants in the right locations. You will have a mixture of small and large tenancies to consider. You will also have tenancy locations requiring special consideration such as food retailing, fashion retailing, entertainment, and services. You can get plenty of ideas by looking at other comparable properties locally or regionally.
From these three simple concepts, you can set in motion a comprehensive tenancy mix plan and retail sales strategy. Understand the property, the tenants, and the customers. Balance at equation so that the landlord can optimise rental returns and minimise vacancies. That is what tenancy mix orchestration is all about.
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When you work in commercial real estate as a broker or agent, the fact of the matter is that you are serving a number of clients and helping them through the challenges of property performance and liquidity. Here are some tips from our Newsletter for Commercial Real Estate Agents.
If you are managing a lot of properties at the same time, it becomes a real challenge to administer the issues related to firstly performance and secondly the liquidity in all the different and diverse properties. Every property owner will have different rules and regulations relating to their lease management, cash flow, and approvals process.
To define both of these important matters:
Property performance is in how you optimise the result the property. Performance can be a number of different things including income, reduced expenditure, tenant mix, tenant retention, and market rental.
The liquidity of the property is the ability to sell it at any particular point in time and the properties attractiveness to the market in general. Throughout the given year, liquidity will vary given the pressures of the economy, and the rates of enquiry that are coming in from buyers.
Today we have a property market that is under some pressure. The global economy is creating some difficulty for many local businesses. That has an immediate flow through to the tenancies in our managed properties. This is where the leasing manager or property manager can provide a high value service to their clients through a tenant retention plan.
The tenant retention plan is designed to identify the critical tenants within each and every property, and then manage them to optimise rental income and minimize vacancy risk. Experienced property managers do this very well and will usually have a tenant retention plan as part of their toolbox of services.
To implement a simple tenant retention plan the following rules can be adopted:
Take the individual property and look at all the leases for each and every particular tenancy. Identify the critical dates that will have impact through the term of the leases and look for those dates that will be related to rent review, option, or lease expiry.
Given these critical dates, look at the next period of 24 months and track any dates that are inside the ongoing 24 month timeframe. The dates related to the exercising of option, or the negotiation of lease expiry will require action as early as possible. There is nothing wrong with negotiating early in each case.
Some tenants within the property will be regarded as more important and critical to the tenant mix. Any negotiations with those tenants should be optimised through attractive terms and conditions that the tenant will find hard to refuse. Any new lease can pick up the growth of the rent for the landlord subject to a strategy and the required holding strategy.
If your property has any anchor tenants, those tenants should be closely monitored for business stability and interaction within the property. Successful anchor tenants create an immediate flow through to all other tenants and give confidence to the property function and identity. Support your anchor tenants at each and every opportunity.
Attention to the tenancy mix and the retention plan will help you through difficult times with the performance of a property. When well maintained and managed, a property will always be saleable and attractive as an investment if a sale has to occur. Property investors and buyers like to see a stable tenancy mix supported by professional lease and property management.