February 2016 — Retail Properties Quarterly —
Page 17
Broker Insights
C
onsumer spending in Denver
is at an all-time high. Con-
sistent improvements to the
economy have created posi-
tive momentum for retailers.
The U.S. Department of Commerce
recently reported that Colorado con-
sumers are opening their wallets
wider than ever before, according to
personal consumption expenditures.
Yet we still find shopping center own-
ers struggling with vacancy. This is a
far cry from the vacancy issues land-
lords experienced a few years ago, but
the goal of every owner and broker
is to put up the best sign in the busi-
ness: 100 percent leased.
Although the economic signs are
trending in the right direction for
retailers, we find growth is more
careful and calculated in this post-
recession economy. For landlords,
this means that a one-size-fits-all
approach to attracting tenants is not
the best way to get your shopping
center leased.
Landlord Strategies
Every shopping center owner needs
to know what he wants to achieve
out of his investment. Depending on
the landlord’s plans, different incen-
tives make sense. If he is looking
to sell, it makes sense to give free
rent and tenant improvements in
exchange for higher lease rates. If he
is a long-term holder, he should not
take the risk on the upfront incen-
tives; instead, he should go for steady,
gradual increases over time.
Some shopping center owners have
good relationships with contractors
and architects and may leverage
those relationships to get deals and
better pricing. Other landlords don’t
want to take on that kind of work and
the potential risk involved. Therefore,
it is important to create a plan and
strategy that fits the investor’s par-
ticular goals.
Often we work with developers who
want to sell a property once it reaches
90 percent occupancy. Their goal is to
reach the highest rents possible, even
if that means providing large TI dol-
lars and other concessions. But some
landlords do not have the capacity to
provide substantial TI allowances. In
these situations, we work with rent-
abatement periods that equal the
market TI.We will add the rent-abat-
ed period on to the lease term, giving
the landlord a full five years of rent,
which can create a nice long-term
cash flow to the owner.
A lot of new developments offer
spaces that are left in a “cold grey
shell,” meaning there is no heating,
ventilating and air conditioning, dry-
wall, plumbing or electrical. The idea
is that these spaces can be custom-
ized to fit the tenant’s needs. National
tenants typically fill these new spaces
but, often, the last few spaces remain
vacant for long periods of time.
Smaller, local ten-
ants are intimidated
by the time and
work involved to
bring these spaces
to a “vanilla shell”
(HVAC, drywall,
electrical), which
would make the
space ready for the
tenant’s specific
finishes. The time
and expense to fin-
ish the grey-shell
spaces can lead to
smaller, local ten-
ants hesitating to lease.
Landlords also need to be willing to
look at their property with a critical
eye. Nobody likes to hear that their
baby is ugly, but the first step to filling
the last vacancies is to understand
why they are vacant still. Parking,
access, pricing and condition of the
space are critical factors in assessing
the desirability of a space. A broker
with retail leasing competency can
look at the space and give advice. It
is important to accept the sugges-
tions and understand that, at the end
of the day, everyone’s goal should be
getting to 100 percent leased.
Key questions for landlords:
• What is the length of property
holding?
• Do you have renovation plans?
• Do you have connections to help
with architecture and construction?
• What types of tenants are the
right fit for your vacant space?
• Should unfinished grey-shell
space be updated to the vanilla-box
condition?
• What are the drawbacks of your
space – parking, pricing, condition of
space, etc.?
Incentives
The most successful retail projects
are made with the right tenant mix,
which means finding tenants that
complement each other’s businesses.
The right mix helps overcome any
project deficiencies.
For example, if you have a few
restaurants with big lunch business,
you may find parking to be an issue
during the midday hours. A tenant
whose peak times are outside of
those peak hours may be essential.
If you have a shopping center that
is not visible to a main road, you
may find a tenant, like a unique res-
taurant, to be a draw for the other
tenants. A location with access or
visibility issues may benefit from ten-
ants that are based on appointments
(yoga, dentists and chiropractors),
rather than impulse shopping.
All tenants are not incentivized by
the same things. Some tenants are
worth risking up-front money and
some are not. The deal structure
should depend on the credit and
financial ability of the tenant. It is
important to understand the tenant’s
operating history, experience and
financials. This will help landlords
creatively structure a deal that over-
comes any tenant hesitation, while
providing the economic outcome the
landlord desires.
Service tenants often are ideal for
smaller neighborhood centers. These
include financial and insurance
companies, dry cleaners, hair and
nail salons, restaurants, convenience
stores and special medical service
providers, such as dentists and chi-
ropractors. These tenants can make
the difference between 80 percent
and 100 percent occupancy. Landlords
must understand that although a
national restaurant chain can pay $30
to $40 per square foot or higher in
rents, it is not feasible for a lot of ser-
vice tenants to stay afloat with these
rents.
Tenant Snapshots
Restaurants can pay higher rents
– they can pay around 8 percent of
their sales – but have higher up-front
infrastructure costs. They can create
a larger parking burden, often have
contingencies in liquor licenses and
have a higher turnover ratio.
Dentists can pay at the high-end
range in rents and have a low default
rate, but often require a large, up-
front TI allowance and can need a lot
of hand holding through the build-
out process.
National tenants like cellphone car-
riers, soft goods retailers and weight-
loss centers are considered national
credit, which are attractive to inves-
tors. Typically they cannot pay the
highest rents in the market and are
not overly intensive on their park-
ing use. They can be a much-needed
addition to a tenant mix.
Local daily needs tenants, such as
nail salons, dry cleaners, liquor stores
and hair salons, have a place in just
about every neighborhood shopping
center. They are not the national
credit tenants that get investors excit-
ed to bid up investments, but these
tenants are looking for a reasonable
package in lease rates, TIs or free rent.
Prospecting Local Tenants
Often the best prospective tenants
are right under your nose. Our first
priority when prospecting for local-
service tenants is with the tenants
who are already in business in the
immediate surrounding area. The first
thing we do is knock on the doors of
the tenants in the immediate area,
instead of trying to convince some-
one to open a second or third location
across town.
We try to identify which ten-
ants may be paying more in adja-
cent shopping centers.We look to
highlight an advantage of moving
into our center, whether it is sav-
ing money or upgrading locations. It
may be that our center went through
recent upgrades that make it cleaner,
brighter or more modern. They may
be looking for financial incentives
such as rent reductions, free rent or
an opportunity to get more space for
their expanding business. Or they
may be looking for an opportunity to
cut costs by getting a small, more effi-
cient space than they are in now.
It all comes down to walking in and
talking to them, listening to what is
important to their business, what
their current situation may be lack-
ing, and trying to create an opportu-
nity for the tenant and the landlord.
We find that we are most successful
when we work to understand the
goals and needs on both sides.
s
John Livaditis
President and
founder, Axio
Commercial Real
Estate, Denver
Even with today’s strong economy, some shopping centers still struggle with vacancy.
Landlords must understand that although
a national restaurant chain can pay
$30 to $40 per square foot or higher in
rents, it is not feasible for a lot of service
tenants to stay afloat with these rents.
