Owners of retail investment properties often look for ways to make their properties more attractive to larger, long-term credit tenants – think CVS, Walgreens, McDonald’s, Chase Bank, etc..
For landlords whose plazas have typically been occupied by smaller, mom-and-pop businesses, repositioning the plaza to attract larger tenants can be particularly challenging. However, having your strip mall anchored by a national credit tenant often makes the property more attractive to other tenants as well. For example, a credit tenant can increase traffic and occupancy rates; each enhances the value of the plaza and justifies a higher price per square foot.
Know what anchor tenants and national credit tenants are looking for
Retailers want to be in vibrant, accessible spaces that draw the right traffic. If you own a strip mall that has historically been comprised of smaller, local tenants, you may need to make cost-effective modifications to the property to make it more attractive to the larger tenants you are seeking. For example, would combining two smaller, vacant spaces allow you to offer a larger space that could fit a national retailer’s minimum square footage requirements? If you aspire to attract a Starbucks, Dunkin’ Donuts or other coffee outfit, do you have the flexibility to allow for a drive thru window? (How) Can you adapt the space to accommodate a loading dock for a big box retailer?
Attracting the right tenants
With the goal of attracting a larger anchor tenant – and, ideally, a national credit tenant – knowing key data about your plaza’s or strip mall’s surroundings is critical. For example:
- How close is your tenant’s major competitor to your plaza?
- What demographics do your existing tenants draw to the plaza?
- Who do you have the opportunity to attract with the right anchor tenant? (population size, demographics, disposable income, etc.)
- What is the daily traffic count in front of your property? (Many credit tenants have a minimum requirement of 15,000 cars per day.)
- Is your plaza surrounded by predominantly residential or commercial property?
- Are there/what are the upcoming residential and commercial building projects in the area?
- Is there comparable retail space available in other nearby plazas?
- Is the accessibility and visibility you offer superior to these spaces?
- Does your plaza offer better parking?
Knowing the answers to these questions will help to identify the right tenant for your space.
It is also important to consider whether or not giving the plaza a specialty focus can help increase demand for retail space. Remember, every market is different. The right retail mix for a plaza in North Shore Boston may differ widely from a plaza in the Bronx. The same can be said for mixed-use space, where the retail tenants occupy the first floor and professional office space occupies the second floor and above. Bottom line, the importance of deep local market insights can’t be overstated.
What makes a national credit tenant attractive?
National credit tenants are typically stable tenants. In many instances, they will be willing to sign a longer-term lease than smaller, more local tenants. Further, national credit tenants, such as big box stores, draw traffic which is beneficial to other tenants in the plaza or strip mall. While the volume of space they need and the specifications of it may require modifications to your existing space, the ROI can be long lasting, as these types of tenants often make properties more attractive to other real estate investors – an important consideration for when it becomes time for you to sell.
What conditions allow retail landlords to increase rates?
There are a number of factors that impact the leasing rates for retail space; having a national credit tenant as the anchor is one of them. Other representative factors include:
- Area vacancy/occupancy rates
- Flexibility of the space
- Major improvements such as increased parking and increased brand visibility (e.g. signage, exposure of storefront to high traffic roads, etc.)
- Nearby residential building projects
- Population and wage growth within a 5-mile radius of the property
While landlords aspire to get top market values for their investment properties, including prime lease rates, maintaining a high occupancy rate and retaining tenants are integral for the long-term success of a plaza. It is important to consider your current vacancy rates, which tenants you risk losing by increasing your retail leasing rates and what the potential impact of that loss is on the plaza as a whole as well as what the demand (and competition) is for comparable space in the given market.
A look at the numbers
While asking rents for retail space in both Fairfield County and Hartford County are beginning to trend downwards, it appears that high-quality, well-located retail assets are still performing admirably. Retail vacancy rates in both counties rose in Q4-2015, landing at 4.9% in Fairfield and 7.8% in Hartford. The Q4-2015 Quarterly Retail Report released by CoStar shows Fairfield County below and Hartford County above the reported general retail sector vacancy rate – which includes freestanding retail buildings not located within a center – of 5.7%.
Northeast Private Client Group has deep retail experience in Connecticut, Massachusetts and New York. If you are a retail property owner or investor seeking retail assets, we encourage you to browse our listings and connect with our team.