When you have a vacancy in a retail property and particularly so a shopping center, you really do need to be careful in finding a replacement tenant. Ultimately your tenant choice can impact the market rent for the property, the customers visiting on a regular basis, and the other tenants in the tenant mix. (NB – you can get easy access to our free retail and commercial real estate course here)
The right tenant chosen to fill a vacancy will help you improve asset performance, and that should be your primary focus as you strive solve the problem of the empty shop.
Look at any new tenant in broader terms and how they could fit into the property in a positive way.
Plan your tenant selection activity
So here are some ideas below to help you improve your tenant mix at the right time with a focus on vacancy management and tenant selection. Understand the relationships and offerings of the existing retail tenant mix, and then question the following factors with your new potential tenant:
- Hours of operation – Will the tenant operate the business hours that match the property and the location? You will need a set of clauses in your lease documentation to hold the new tenant to the operational hours that you require.
- Experience – What experience do they bring to the property and can they show you that they have successfully operated elsewhere? Get them to show you how they offer their retail product, merchandise or service. If possible, visit another location where they may be currently trading successfully.
- Marketing spend – Whilst you will market the overall retail property now in some way or form, how will the new tenant market their business? If you are talking to an established retailer, they will have a plan. Ask to see their marketing plan (and budget) and question the process of business promotion to see how it can work.
- Signage – What signage will the new tenant require for the shop and how will that signage in both design and placement impact the overall retail image of the general area? You will have certain signage rules and specifications for existing retailers now, so question how a new tenant will or can build their brand from new signage in and around the existing vacancy. Get copies of shop layout and signage intentions. Those items will need approval before any fitout activity starts.
- Fitout design and quality – The customers to a retail shop soon see presentation issues and problems. They know when the fitout is not right or perhaps cheaply installed. They know when they are walking into a shop that has been poorly constructed, or when the retailer has operational and trading issues. If you are going to maintain the quality image of your shopping center, then ensure that you specify shop fitout issues and finishes. Include lighting and signage in that assessment.
- Merchandise or service offering – Ask questions about the shop offering and then consider how that offering could fit into the overall property in a positive way. You don’t want to threaten the trade of your other tenants by bringing in a retailer that could disrupt trade or customer interest.
- Drawing power – Some retailers attract and pull in customers from certain demographic segments and or broader distances from the shopping center location. That drawing power can be a positive enhancement to your existing tenant mix. Look at those factors of attraction as you negotiate occupancy issues with a new tenant.
- Existing tenant mix – Given the location of your vacancy, assess the nearby tenants and the clustering factors that could apply, or should be considered when you are to place a new tenant into the group.
- Competitive conditions – Particular market segments and retail classifications will compete; others will complement each other. That can be both in the particular property and also in the region (in the case of larger brand based retailers). Review nearby shopping centers and retail properties so you can see if there are factors of competition that could be relevant as you place new tenants into your property.
- Brand value – If you are to place a ‘big brand’ retailer into a retail property, consider the retail brand and the franchising agreement or merchandise agreement that may be impacting their trade. The strength of the brand and their offering may be valuable to your property and the vacancy that you have, but the franchise agreement will very likely have to match the duration and terms of the lease. Can you do that with the existing investment plans for the property? How can that work? Look at the required lease terms and permitted use provisions; they should be examined to make sure there are no ‘clashes’ of retail trading provisions and occupancy conditions.
So there are some important factors to consider here as you find and place new tenants into your retail property. Ask all the right questions as you move through the lease negotiation and achieve an occupancy agreement to successfully fill your vacant retail shop.