The most common problem in tenant mix strategy is lack of focus and relevance. As a common rule, identify your tenancy strengths and build around them and on them. To do this you need to respect and understand what the market and customer needs.
Tenancy mix becomes very important in retail premises of multiple tenants; that will be shopping centres of all sizes and types. A property that does not reach the needs or interest of a customer, is going to fail.
A customer wants to be well served in their shopping needs and feel good about it when they visit your property. Visit the competition shopping centre properties nearby to compare them to that which you are currently leasing. You must understand the other properties that you are competing against together with the strengths and weaknesses that they experience.
In reviewing these other properties you look at things such as:
o The entrance ways
o The car parks
o The flow of people
o The places where people stop and congregate
o The larger anchor tenants type and location
o Standards of signage
o Lighting internally
o Transport to and from the property
o The tenants that seem more successful than others
o The tenants that seem to feed customers off each other
o The amount of time that people spend at the shopping centre
o The busier days for customer shopping
When looking at these other properties it is wise to take selective photos of the things that may be relevant to compare to your property. You can analyse the photos later and revisit your ideas. Note that some property owners and managers will be sensitive to you taking photos around their property. Discretion is the rule here.
Seek to Strengthen your Rent
The only way you can underpin your rental and strengthen it is through a good tenancy mix. Given that the leases in premises are for lengthy periods of time, any mistake with tenancy mix will exist for years and frustrate the rent, the customer, the tenant, and the property. Hence you must choose tenants well and then place them with a lease that is in harmony with surrounding premises.
As parts of that process look at these issues in balance so that any concerns of tenant mix occupancy are removed and nullified. Understand:
1. Income exposure at expiry
2. Option exercise potentials
3. Exclusive or Permitted uses in the leases
4. Vacancy effects on other existing tenants
5. Relationship building or conflict potential between sitting tenant types
6. Know why tenants like or dislike your property
7. Know how your existing tenants maximise their business operations at your property
If you follow these steps, you will be armed with the strategy you need to put you in the ‘driver’s seat’ as you implement a new leasing campaign and tenancy mix for your managed property. You will know the tenant you want and you will have the selling points to attract them.
Create a Property Business Plan
The larger the property, the more there is a need to have a business plan to consolidate the performance of the property. The business plan will have ramifications on the design of the tenancy mix.
The business plan will set directions for the property given known demographics of the surrounding population and customers. Business plans are very useful with retail properties where the success of the tenant is driven from the customer’s acceptance and use of the property.
The business plan for a property is designed to set essential standards and targets within:
o choices of tenant
o ideal lease terms
o expiry profiles
o targeted rentals
o product offering for customers
o levels of rental relevant to rent reviews
As the agent working with the client to enhance the tenancy mix requirements, you can adopt this business plan approach with adjustments for the suitability of tenants and the size of the property.
Review the Site
With retail property planning and tenancy mix a number of site questions need to be addressed. They are:
1. Is the access to the property good or hindered?
2. Is access possible from all directions or is there a physical barrier?
3. Is road exposure of the property of good quality and can the signage be easily seen or erected?
4. Is the property easy to locate or find?
5. Is public transport available and how does it work?
6. What is the identity of the property and can it be clearly seen from the road? Is it modern and adequate?
7. Does the parking around the property support all the Customers and Tenants well? Does it need re-design or functional changes?
8. What customer services exist? Are they adequate and modern? (Parking, Toilets, Malls, Seating etc.)
9. Is the internal property layout ‘Customer’ friendly? Can Customers easily understand where they are and can they shop in comfort?
10. Is the tenant signage conforming to good design (or Centre standard) rules? Is it well maintained?
11. Are ‘sight lines’ open and un-cluttered to the retailers shops?
12. Are more customer services needed?
All of these factors affect every retail property. Once you understand them you can lease the vacancies and mix the tenants more effectively internally.
Use them in your inspection strategy on any retail property analysis when you consider where tenants can be located and realistically placed for optimal rent returns.
The tenancy mix thereby creates substantial success in a property. ‘Clustering’ is a process of gathering tenants into groups. The perfecting of the clustering of tenants for each property is as important as finding the right tenants.
Clustering is gathering tenants of the same type into the same location. The process is productive and has been proven to generate higher levels of sales for most tenants in the cluster. You can have clusters in all retail groups such as fashion, food, men’s wear, ladies wear, toys, etc
When you have clusters of tenants, the customer perception is that the property offers greater variety and therefore will have the item that the customer seeks. The customer is therefore more likely to visit the property and acquire goods.
Clearly we can now see that 2 key issues in tenancy mix are:
1. Adding successful tenancies which suit the demands of the community and the profile of the property, and
2. Clustering tenancies in groups so that the localized groups encourage more customer interaction and spending.
The key to clustering tenants is simple. You cluster tenants by similarities, and you avoid placing tenants into clusters if they’re offering product that is radically different than those around them.
Early in shopping centre evolution, it was originally thought desirable to split tenants of similar offering into random locations which do not clash with each other. The customer then had to traverse the entire property to purchase goods. The leasing managers felt that this would create more exposure to all tenants and therefore more sales. Unfortunately this is incorrect.
This strategy has been found to be counterproductive as customers see the long trip or walking distance between similar shops as being annoying. Today we know that customers prefer ease of shop access and ease of shopping experience. This does not involve random tenant placement to frustrate the shopping experience.
So the golden rule here is to place like with like and complementary tenants near each other. In doing this the customers will support your shopping centre more effectively.
Creating Tenancy Flux with Timelines
A stagnant property is one in which change is limited or not seen to be happening. The customer perceives this and over time will move the bulk of their shopping needs to another more active and changing property.
From this observation we can now see the need for a flux or change factor to allow the property to move with the demands of the customer.
In any successful and active shopping centre, it is reasonable to assume that up to 20 to 25% of the tenancy mix will be continually shaped and repositioned during each period of 12 months.
To allow this to occur, it is necessary to have lease and occupancy documents which allow staggered expiry dates. The staggered expiry profile then creates an element of planning and repositioning of tenancies as the property needs. This is opportunity management at its best and a great strategy for the future of the property for the landlord.
Options Can Frustrate
This strategy of flux can be frustrated by the giving of options to tenants as part of the initial leasing process. By their very nature, the options given in a lease are at the discretion of the tenants and therefore remove flux and change opportunity from the landlord until the lease is to expire. It can be said that options in a leasing process are not good for landlords and tenancy mix.
Options should only be given as a last resort in a leasing process.
Tenants view options as essential to their future and will usually push the landlord to grant an option(s). As a leasing strategist and specialist, you will need to balance and minimise this problem for the landlord when it arises.
There are ways of lessening the impact of an option such as:
1. no option at all
2. shorter option terms
3. less option terms
4. short option exercise windows in the lease
5. rent review escalations that offset the inconvenience that options create
The desirable alternative is to not give options at all to tenants where that option could stifle tenant change and mix for the property. That means that desirably every lease is for a single term. New leases with existing tenants are therefore then negotiated based on their merit and relevance to the property.
Be careful and aware of legislation that can affect this or set rules that you must adhere to. For example in many locations Retail Lease Legislation will need to be understood and respected as it could set guidelines and rules for the leasing process and options for tenants.
Tenant Proximity Profile
It is a poor management and leasing process to allow a number of tenant spaces to expire in close proximity to each other at around about the same time. The leases that need to co-ordinate on expiry dates are only those that may be subject to similar relocation or refurbishment activity. Strategy is the rule here. Planning ahead is the key to setting expiry dates that keep the property in balance for the client and the needs of the customer.
Some tenants in shopping centres are more volatile than others. This is particularly the case with food and beverage tenants. Volatility must be understood and well controlled as the tenant pressures change. Volatility means that some of the tenants you place may be more or less successful when compared to others on the property.
There are essentially two types of volatile food tenants, firstly fine dining, which is a lifestyle and entertainment offering often promoted by cuisine or concept. The second is the more common fast food tenants to satisfy spontaneous customer food demand.
Fast food tenancies and their success tend to run in cycles and the offering of the relative food. You have to anticipate trend changes in customer demand for fast food and the placement of the tenant in fast food courts. In most cases, customers demand choice, value, and quality in the food offering above all else. Interestingly the theme of the food is of little importance to the purchase decision of customers. Quality wins every time when it comes to a food related tenant.
Given these rules applying to food tenants, it can be seen that close management and interaction with the tenants is essential for positive occupancy outcomes.
Generally speaking we find that the larger the tenancy in area, the lower the rental per square metre. This rental fact is sometimes partially offset by creating precincts of tenants in clusters through the shopping centre.
The clusters of like and similar tenants can hold up the rent levels more successfully than shops of similar type being spread widely apart across the property.
Identifying the ideal size of a tenancy and its placement is important. There is no point making a tenancy overly large for the offering and product that it sells.
To get a feel of the correct ideal space ratio, it is best to visit other properties of similar type or location, in your precinct. With some practice you can quickly guess the size of tenancies therein, and then determine if extra space is needed by business type to successfully trade. You can determine if the actual space used is appropriate for the product being sold.
Remember the Future
When selecting the right tenancy for the area of vacant space, you need to consider whether the tenant can afford the required rental and the estimated escalations in the lease through the rent review profile on an ongoing basis.
All of this is strategic and essential to the future of the property. A tenant should not be placed in a location based on today’s offering, but rather in the balance of today against the future of the property and its changes.
Bundle Related Tenants
When clustering tenants as mentioned earlier, you generally locate and cluster tenants with the same retail offering so that they can provide the customer with a broad selection of product e.g. ladies fashion.
You can then take this further and bundle related tenants together to offer complimentary products. For example this could be a sportswear shop, and a golf shop in the same area of your shopping centre.
Sensible bundling of tenancies will thereby improve the customer experience and encourage further purchasing of product. The more successful you are at this process; you will improve the rental profile for the building and the visitations of customers to the shopping centre. Spending money in a retail shopping centre only occurs when the customer feels good about the offering and the location of the shop. The better this balance is created in the eyes of the customer, the better the sales for the tenant. That will then give you better rent.
The easiest way to position a tenant for trade is to create great signage. The important thing to remember in balance with all other tenants in the same location, is to choose signage which is complimentary and of similar size and dimensions to the other tenants nearby.
Sensible signage policy and architectural control of that signage between tenancies will consolidate the customer experience and visual appeal of the shopping centre.
In saying this regards the signage, the uniqueness of the retail product offering shall also be respected so that the customer can clearly relate to the product being sold and remember the offering for the future. A case in point would be the need to ensure that brand name retailers use signage that is in keeping with their identity (e.g. McDonalds).
It is not appropriate to exercise architectural controls that exceed sensible display of the tenants offering. For example it would be inappropriate to cross the boundaries of trademark and signage for franchise tenants that require that image to identify themselves. In most cases, the franchise tenant should be allowed to clearly promote their franchise identity. After all that is the reason you have them in the property.
Landlords must be flexible, and tenants must be flexible. A shopping centre is not a static environment. Ongoing change and presentational issues across all tenancies and in balance with the clusters, and bundles of tenancies is important to maintain high levels of rental and a great tenancy mix.
You can read more on this at our special website for Tenant Mix Strategy here www.tenant-mix-analysis.com
John Highman is a prominent commercial real estate speaker and trainer. His other articles for commercial real estate agents and brokers can be accessed at http://www.commercial-realestate-training.comShare on Facebook