Shopping Center Business

MAY 2016

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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LEASING 346 • SHOPPING CENTER BUSINESS • May 2016 W hether developers are bringing new retail to urban or suburban projects, there is an ever-grow- ing trend towards delivering unique ten- ants to the local community as consumers crave authentic, memorable and dynam- ic experiences. Successfully selecting the right tenants ultimately differentiates a landlord's project from nearby competi- tion, creating a tremendous branding op- portunity. The phenomenon has forced developers to move away from the securi- ty of national and regional credit tenants. With that said, bringing in hip and trendy tenants challenges owners to use a new selection process when identifying and qualifying tenants. In addition to a savvy and experienced tenant rep broker, a prime resource in identifying the latest buzz-worthy tenants is social media. Social media platforms can give insight into the latest pop-up stores, foodie trends, hot restaurants and food truck concepts. Even online retail concepts that may be ready to test out a brick-and-mortar store can be found on social media. Going a step further, if these tenants are integrating social media and technology into their business successful- ly, they deepen the connection with their customer and develop a strong brand loy- alty. This can serve as a barometer of the long-term viability of the tenant. A retailer must deliver a superior product and excellent customer service, however in today's world it also needs to provide a unique experience and find an emotional connection with the customer. Ultimately, the goal is to identify concepts that have been around long enough to generate buzz and have proven financial success, enabling them to afford to add a new location. As a landlord, it is important to un- derstand a tenant's business in order to ensure a specific location is an ideal fit. Since the tenant may only have one or two locations, site selection is a relatively new endeavor, so it is up to the landlord to ensure the tenant will be there for the long haul. Who is its customer? What type of center or project (lifestyle center, urban mixed-use, suburban, etc.) works best for its business? Does the project fit a spe- cific retail center's profile? Will the local customer understand and appreciate the brand? Does the brand appeal to the de- mographic when considering incomes, traffic patterns and how far customers will have to go whether walking, driving or utilizing public transportation? It is key to understand a tenant's business plan and to have confidence in its ability to run a business long-term. In understanding the retailer's busi- ness, it is important to evaluate the local competition as well. What sets this tenant apart? Is the market oversaturated in this category or can it sustain a similar con- cept? Is the tenant going beyond what the competition is doing to dominate its category? It is critical to understand what will drive customers and keep them com- ing back. Beyond understanding the tenant's cus- tomer base, there should be a business plan that includes a projected balance sheet, profit and loss statement and rent projection analysis. In reviewing financial models, it is necessary to evaluate how realistic the plan is for rent affordability. Does it coincide with market rents and do pro forma rental increases align with the tenant's expectations? Additionally, does the business model allow the income needed to cover the cost of expenditures? For instance, if the price points are fairly low, the tenant will have to achieve huge volume to make the numbers pencil. Has this model worked at other locations and is it feasible in this location? Does the mer- chandising and design strategy fit with the overall aesthetics of this project's design and, if not, can it conform? Ultimately, the tenant's business should enhance the retail project. The relationship between landlord and tenant has become a partner- ship. It is important to make sure that the rents are reasonable for the right tenant, so that it can truly be successful and drive traffic to the project. This will generate the anticipated buzz as part of the sign- ing strategy. For the right tenant, it may be necessary to get creative with how a lease is structured — perhaps by offering a lower base rent with some percentage rent in the beginning and then bumping up to mar- ket rates at some point further down the road. Structuring lease terms that allow the landlord to achieve its desired pro forma while allowing the tenant to thrive is a delicate balancing act, but when done correctly, it will benefit both parties. Another important aspect the landlord must understand before partnering with the tenant is who will be running the new location. If the person who was re- sponsible for the brand's success will be hands-off at this new location, that may be a deal-breaker. It will be important to have an experienced, goal-oriented manager responsible for carrying on the brand's success. The same basics still apply when select- ing the right tenants for a project. Howev- er, the retail game has changed drastically over the last 20 years. As consumer tastes have grown more sophisticated and the retail experience has changed, the land- lord also must alter its approach in qualify- ing tenants to ensure the right tenant mix with the local trade area. SCB Stephanie Skrbin is Principal at Avison Young in Los Angeles. The Perils Of Trendsetting The ups and downs of bringing trendy tenants to new retail projects. Stephanie Skrbin Skrbin

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