From time to time you will get retail properties and shopping centres that have a rising vacancy problem. When this goes on for too long the vacant tenancy space becomes ‘stale’; the customers to the property get a message of property decline. Soon the customers to the property are shopping elsewhere.
So the important lesson here is that the vacancies in a retail property have to be dealt with quickly and effectively. The tenancy mix has to be strengthened at every opportunity. If you have a difficult vacant area or areas to lease, you can consider an ‘incubator’ leasing program.
What is ‘incubator retail shop leasing’?
The concept behind an ‘incubator leasing program’ is simple. You should be seeking to fill the difficult vacancy at a very low rent start with a tenant that has long term benefit to the property. The ‘low rent start’ should at least cover the outgoings recovery for the property relative to the tenancy size and location. The tenant should give you a lease agreement that reflects a potential greater occupancy term and rental providing they satisfy the landlord that they are successful and relevant to the property tenant mix.
It should be noted that ‘retail’ leasing is sometimes governed by retail leasing legislation. You should be complying with the laws and standards of retail leasing in your location as part of the ‘incubator’ program. Seek solicitor help if you do not understand this part of the industry and the leasing processes around it.
As the tenancy extends over the first 9 to 12 months, the rental ramps up to a full market rent; a long term or better quality lease will then evolve if the tenant has integrated well into the property and the tenant mix. You can and should track the trade of the incubator tenant to ensure that they are growing their business and sales.
There are some special considerations here:
- The initial quality of fit out has to be low cost and flexible as the tenant is in the incubation stage of occupancy. If they are to be given a new lease at a later stage, certain criteria should be set to take the fit out to a better standard when the longer term of lease is established.
- Match the incubator tenant to the standards of the property and the tenant mix. It is one thing to have a tenant fill a vacancy; it is another to have them successfully trade. The product or service offering made by the tenant should be matched to the customer profiles for the property and tenants in occupation now.
The object of this program is to get a retail property that’s under pressure to change its direction and hence resolve its leasing problems.