Commercial Real Estate, Capital, Insurance, Leasing & Management

What Tenants Need to Know About the Retail Market

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For first-time entrepreneurs, the landlord approval process has become onerous. Landlords are looking for tenants who have a detailed and realistic business plan as well as a strong financial package that shows the net worth of the individual who owns the business, his or her liquid assets, and business background.

The rebound in the nation’s economy is boosting retail sales and spurring an uptick in the number of retailers seeking to expand their presence in existing markets or grow into new trade areas. However, the boom does have a downside for those tenants, as most are finding out.

For first-time entrepreneurs, the landlord approval process has become onerous. Landlords are looking for tenants who have a detailed and realistic business plan as well as a strong financial package that shows the net worth of the individual who owns the business, his or her liquid assets, and business background.

Landlords are most interested in the business ownership or management experience of the person who’s going to run the franchise or small business. To them, that’s a better predictor of whether the business will succeed.

This and other demands result from two forces coming together — an increase in people wanting to be their own boss and vacancy rates coming down.

According to CoStar, Jacksonville’s retail vacancy rate decreased to 7.3% in the fourth quarter of last year – a significant decrease from the 7.7% rate in the first quarter and the 8% rates in 2013. The amount of vacant sublease space also continues to drop with only 277,813 sq. ft. vacant in the market. Overall, rental rates are also up from previous quarters at $12.57 per square foot.

The national vacancy rate has also fallen in the last quarter, landing at 6.1 percent. Rents at the end of the fourth quarter in 2014 were at $14.90 per square foot per year, compared to $14.67 per square foot at the end of the first quarter. Other Florida markets like South Florida are seeing 5.1% vacancy with higher rents hovering at $22.93 per square foot.

Tenants, especially those who are new to owning a business, need an experienced guide who can show them what to pursue, what to avoid, and what to expect. Here are a few things that are most important when looking for that ideal location to open your business:

Location is key. First-time business owners often want to open shop in their own neighborhood to keep the commute short. They should focus on looking for the best locations, which may be across town. They also need to find neighborhoods that best fit the customer of their chosen business or franchise.

Questions about location and area demographics can be entrusted to a tenant representative and franchisees would benefit from a representative that has experience with their type of franchise.

The tenant representative should gain an understanding of the business whether it is a restaurant, hair salon or a specialty store. That knowledge becomes vital when the franchisee and representative start touring and evaluating sites.

Another key factor is complimentary co-tenancy and finding the right tenant mix in a shopping center. Do the other stores bring in the type of customer you want to attract? Or, do those stores compete for your business? For example, a hair salon should be located near a supermarket or daily-use tenant such as a pharmacy or big-box retailer to take advantage of the constant foot traffic. A deli might find synergy from other counter-service restaurants, as they attract customers who are in a hurry and will make last minute decisions based on wait times. Though some franchisees see that as competition, it can be one of the driving factors of their success.  

Something else that might surprise first time business owners – certain anchor tenants, such as grocers or department stores, will prohibit other types of businesses from opening in the same center. Gyms, for example, are usually restricted from opening in the center due to its parking intensive use. Some retailers don’t allow restaurants, dollar stores or drug stores within 75 feet of their entrances because of the potential for overcrowding or competition.

In addition to the criteria discussed above, other important factors to consider are accessibility, visibility and availability of signage for not only the store itself, but any monument or pylon signage at the center’s main access point. An educated franchisee working with a knowledgeable and experienced tenant representative will know which locations will offer the most opportunity.

While finding the right spot can be tricky, navigating ones way through a Lease negotiation holds its own sent of roadblocks for most franchisees or business owners. In today’s market, Landlords are giving up very little as far as terms and conditions in the lease. For example, personal guarantees, an unsecured written promise from a business owner guaranteeing payment on a lease in the event the business should default, are almost always a requirement for a first time business owner.

While tenant representatives were once able to negotiate limits on personal liability of 12 months of rent; today, owners are looking for full term personal guarantees.

In this post-recession environment, retailers are finding out that Shopping Center owners now require annual rent increases of three to four percent. While flat rents were acceptable in the   past, after years of seeing no increases in revenue, Landlords are hungry to make up for lost time. A majority of landlords are now requiring four percent annual increases at Class A centers – and they usually get it.

Another item that tenants can ask for, but probably shouldn’t assume will be agreed to, is exclusivity. Landlords are reluctant to grant exclusivity because it limits their future options and potential income in the shopping center. However, exclusivity can be agreed to if a retailer is willing to meet on common ground.

Landlords will also give tenant improvement allowances for the right economic deal and tenant. Required build-out specifications should be submitted during lease negotiations to avoid surprises. In most cases, landlords won’t push back on tenant specific build-out requirements on new construction because this will typically save everyone time and money. They also recognize that some improvements are necessary based on franchisor requirements and the type of business.

Most importantly, retailers need to have patience. After finding the right space and signing a deal, it could be months before they start operations. A good tenant representative will walk their client through the process and timeline of finding the right location, negotiating a deal and the permit and construction process. But often, first-time business owners are surprised by the delays and get frustrated. Be patient.

Days will turn into weeks that turn into months; and until the day the building inspector signs off and the franchisee opens their doors, this process will feel unending. Stay patient, stay educated, and keep communications open with your tenant representative in order to make the process as fun and exciting as it should be. Opening and operating a successful business will make it all worthwhile. 
 
Carrie Smith is regional managing partner in Franklin Street’s Jacksonville office, specializing in retail tenant and landlord representation throughout North Florida. She can be reached at 904-271-4120 or via email at Carrie.Smith@FranklinSt.com.

 

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