The 3 Biggest Mistakes in Retail Leasing & How to Avoid Them

Too often, Lessees are making these three common and extremely costly leasing mistakes. Read through these tips to ensure you do not fall into these simple traps.

Selecting the Wrong Retail Site for Your Business

Retail site selection is a complex decision which will have great influence on your retail strategy going forward. It is extremely costly if you get it wrong and there exists little flexibility once a location has been chosen and a lease has been signed.

Site selection requires careful research involving a combination of macro factors, centre-specific factors and site-specific factors.

Macro Considerations

When considering a retail site, it is important to determine your trade area by recognising the influence of macro factors including:

• The demographics of the area (e.g. age, income, etc.)
• Barriers such as rivers, oceans, parks, major highways, railways or bottlenecks
• Centre competition

It should be evaluated whether these factors meet the target demographics you require for the business, as well as the demographic growth potential for your trade area.

With the rise of omni-channel retailing, understanding your supply chain and e-commerce/delivery strategy is critical.

Centre-Specific Factors

Ask questions such as: how long has the centre been here? Does the centre dominate the catchment area? When was the centre last refurbished? What is the public transport access and parking like? Does the centre have a certain theme, or perhaps a point of difference?

The more mature and well-established the centre, the better the defensive quality (as long as capital expenditure has been maintained). Researching into these questions will allow for a better understanding of the centre.

Site-Specific Considerations

Site-specific considerations include factors such as foot traffic, co-location near anchors, distance to car parks, distance to escalators, strip locations or the existence of a casual mall leasing threat.

There should also be an analysis of the shape and size of the premises, with larger frontage indicating higher value. You should avoid paying full rent for areas which are of lower value (e.g. L-shaped premises, poor frontage to depth ratios).

The visibility of the shop and strip is also critical, acknowledging the influence of sight lines and signage.

Not Knowing Your Sales Potential and Not Understanding Your Competition

Once the site has been selected, a crucial next step is to forecast potential, identify and analyse your competition and grasp an understanding of the past tenant.

Forecasting

Forecasting helps to approximate the sales potential for a shop, an understanding which will be extremely important for the future of your business. Three simple retail forecasting techniques which can be utilised include:

1. Regression models: Using data from current successful stores to predict sales for the potential site. Simple regression looks at single drivers to predict sale with multiple regression involving a combination of these factors.
2. The retail saturation index: The index multiplies households in the trade area by yearly retail expenditure, then dividing this number by the size of the area in square metres. This result becomes a baseline for comparison and can be applied to potential centres and their trade area, with a higher index number being more desirable.
3. An adjusted rate/square metre model: Rates are analysed and adjusted with regard to factors including moving annual totals (both for the centre as well as for your specific category in the centre), occupancy cost ratios, pedestrian traffic, etc.

Identifying Your Competition

You should understand which shops you will be competing with, as well as examining information such as where they are in the centre, what their foot traffic is like and their expiry profile. Ask yourself – what is your point of difference?

It is important to consider whether the market is already over-saturated, which can also be looked at using the market saturation formula.

You should also strive to compare your own proposed rent with occupancy costs of your competition.

Understanding the Past Tenant

Who was the previous tenant? What did they pay and why did they leave? These questions will help you grasp an important deeper understanding into the retail site, including both the potential and the risk of the premises.

Poor Preparation for Lease Negotiations

With step one and two completed, the biggest battle to acquire the best deal is about to begin.

With an average Australian shopping centre lease costing well over half a million dollars over five years, sometimes more than $1 million, you need to get this right.

It is important to enter a negotiation prepared with:

• A market understanding: A thorough understanding of your market and your competition (including price points).
• Your financials: A detailed plan of your revenue projections, and ideally, a 5-year plan. It is also important to show a strong track record showing financial viability.
• Fitout: A detailed plan of your fitout, including cost and time breakdown. This will assist if you are wishing to obtain a fitout contribution.
• Comparables: Comparable leasing evidence relating primarily to the proposed use, as well as generally across the centre.
• Know your obligations: Understand your obligations under the lease, including bank guarantees, turnover provisions, make good, fitout, etc.

Remember to negotiate from a position of strength – and knowledge is power. Enter a negotiation with the correct preparation to ensure you are obtaining the best possible deal for yourself.

Conclusion

Following these tips will help you avoid falling into these harmful traps. Understanding these matters therefore allows you to make sure you are entering the best retail lease for your business and avoid making very expensive mistakes.

Author

This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.