As we move from 2018 to
2019, there is a change evolving through the retail shopping centre ownership
and investment market. Around Australia
and in Queensland you can see retail indicators growing. The stronger retail properties stand out as
the ‘performers’, and the weaker ones can lose
their retail customer base all too easily.
The successful retail properties today are notably in categories of
either:
Regional
Neighbourhood
Destination
Tourism integrated
These retail focus categories work well, and some shopping
centres are a mix of a few. How can you
strengthen your retail property and its category? Positioning is now important to attract
customers to the retail offering, and in supporting the tenants with potential
sales. Don’t let your retail property
become ‘mediocre’.
Neighbourhood shopping centres will of course always exist,
but the shaping of the tenant mix is critical to capture the local shoppers
before they engage with regional retail offerings. The retail customer base is more ‘mobile’ and
will easily travel to the retail property where they can get the products or
services, but more importantly the entertainment. Shoppers like to feel good as they
conveniently shop locally or regionally.
If you own a shopping centre or are considering the purchase
of one, consider the positioning of the property now and how it could be
‘strengthened’ in its category and location.
Get positively involved in the future attraction of your retail property.
Where can you start with that? Choose the category of retail
that should apply with your property and its demographic, and then boost the
tenant mix, the customer attraction, and then the market rent. All factors are linked. It is a retail equation for landlords.
Shopping Centre Optimization Planning
As an extension of that idea, here is a ‘base plan’ for
retail shopping centre optimization:
Support tenant retention with quality tenants
Reduce vacancies before they appear
Balance the tenant mix for quality
Market the Shopping Centre comprehensively
Know the local property market and customer base
Apply local area marketing online and offline to
the customer base
Engage with your tenants frequently
Watch your outgoings costs and comparisons for
the area and property size
As a final note, the entire sector is shifting with the
pressures on retailers from the internet; customers like to purchase goods and
services ‘conveniently’ online. This directly says that the landlords of
shopping centres should consider all the strategies behind their tenant mix,
shopping centre operations, lease management, marketing, and their income base.
It is a fact that many shopping centres in Australia and the US are suffering a ‘slow death’ with their traditional department stores as anchor tenants. The factors of attraction with the typical department stores are no longer as evident as in the early 2000s, and in most cases are now in decline.
Department stores originated in the 1980s when we didn’t have the internet and a ‘global economy’. We also didn’t have the huge variety of goods and services that we have today. We didn’t have mass and multi-channel communication tools at our fingertips to buy and sell products and services.
Know the tenants in your tenant mix
Retail Goods Marketing Change
The marketing of retail goods has changed dramatically, as has the sale and supply of retail goods. Customers today can buy just about anything they want from a huge number of suppliers online. Ladies fashion is a good example of a shifting merchandise category. The main reason customers go to a shopping centre today is for the ‘immediacy of purchase’ and for the entertainment.
Today, customers can get most of their products and services from all around the world; they can shop from the convenience of their lounge room, and in doing so they can purchase at the best prices. Sure, they may have to wait a few days to get their goods, but they know they have purchased well, and they trust the proven supply chain to deliver goods on time and accurately.
Customers can shop from their mobile phone, or their laptop computer. Shopping is so easy online; far easier than visiting a department store with depleted staffing numbers and poor service. Department stores still play with the concept that ‘big is beautiful’ in retailing. That business model is from the 1980s and is outdated. ‘Big’ doesn’t work in retail anymore. ‘Experiential entertainment’ is the new factor of attraction for retail customers to a retail shopping centre of any size. The customers want to enjoy shopping and be entertained. Smaller neighbourhood shopping centres, on the other hand, exist as a ‘convenience’ factor for the local community.
Remember when ‘Uber’ took on the large taxi companies and won? The same timeline is now evident in shopping centres. The specialty tenants are now more relevant in the tenant mix than the larger department stores.
Understand your shopping centre and tenants.
Retail Customers Today
Customers are today visiting shopping centres for just a few simple reasons, and they are mostly:
Convenience
Service
Entertainment
Value, and
Variety
‘Big’ is no longer a drawcard in retail property performance and customer attraction. Customers don’t necessarily want or need ‘big department stores’ anymore; they are just not interested in shopping in some ‘boring’ department store with a 1980’s business model and low staff numbers to serve them. Retailing has become more ‘refined’ and specialised. The purchasing of retail goods has to be easy and fast.
If you own a larger retail shopping centre with a department store anchor tenant, be well aware of these problems and ensure that you encourage the department store to adjust to the retail shopping trends of today.
Recently I was approached to look at a large retail shopping centre in a suburban location; specifically, to resolve leasing issues and vacancy problems. The property was some 30 years old, and the current owners were consistently ‘aggressive’ in setting higher rentals and protracted lease negotiations.
Interestingly, the landlords, in this case, were blaming everyone but themselves for poor investment performance. Their properties were in decline.
Some landlords can’t see the ‘wood for the trees’ if you know what I mean. The tenant mix, in this case, was being destroyed.
Putting the pieces together in a shopping centre.
A fair rent is a fair market-based rent
Now, don’t get me wrong here; a fair rent is always a reasonable charge to raise for shop occupancy. Its when things go too far the other way with the landlord escalated higher rents that the retailers of the property feel the impact.
It is very hard for a retailer (which is usually and simply a small business) to walk away from something that they have put tens of thousands of dollars into and hundreds of hours of personal work.
Many tenants try to live with the ‘financial pain’ of high retail rentals in the hope that things could get better with a lift in sales. If, however, the landlord is not supporting the promotion and presentation of the property, then everything gets quite difficult. The customers, in this case, were not coming back to produce that ‘boost’ in sales.
The fixed percentage increases in rent reviews today can also be a problem. The days are gone of 5% pa increases although some landlords would like to achieve that. In this changing retail property market, 3% is commonly still too high, and CPI is a fairer equation for all.
It is better for a landlord to take a lesser rental from a tenant and or the tenant mix, and thereby achieve occupancy stability for the long term. That’s where the landlord and tenant partnership is so important.
When I look at any retail property, I like to investigate all the factors of the property before I recommend anything. To understand the basic facts in this particular situation, I asked plenty of questions and talked to the landlord, plus the customers and tenants to the property.
Know what shoppers are looking for
What did I find out?
I found out that the landlord had owned the property for some ten plus years and over time they were slowly ‘killing’ the tenant mix through pushing rents up to the detriment of the existing tenants and their ability to trade. This property was one of a few shopping centres owned by the ‘family’ as part of an investment portfolio. The landlord with a large portfolio had no great financial pressure, but the tenants had plenty.
In this case, and because of the high rents, the existing tenants had lost their ability to produce a reasonable net income from their businesses. The downward spiral in the tenant mix was well underway; tenants were talking between themselves, and they were consistently unhappy. The landlord at the same time (not wanting to spend money on the maintenance of the asset) was allowing the property presentation to decline. The customers could see all that happening in degraded property presentation; customer interest in the property was also in decline. The auto tellers (ATM’s) were looking to pull out from occupancy at lease end. When that happens, you do have some real proof that a property is in decline with customer interest.
It is no secret that the retail part of the property market is changing; landlords need to be careful as they seek to improve property performance. Retail shopping doesn’t go away; it just changes. Today there is a shift in customer shopping patterns due to online sales and the impact of internet products and services. Shopping centre owners should respect the changing property segment for its complexity, strengths, and weaknesses. A good quality retail property will be either a ‘destination property’ or a ‘convenience centre’. There is no ‘middle ground’.
Investigate the retail offering.
In this Case?
So, what was the outcome in this case with this shopping centre? This is what I found out after investigating the property:
High and escalating vacancy factors
Low levels of new tenant enquiry
Tenants struggling to exist and pay rent on lease rent
An increasing level of ‘pop up’ tenants to fill vacancies at lower rents
Solid levels of competition in the local area from other retail properties
Negligible local area marketing to boost retail sales and customer interest
Poor tenant relations with the landlord – lack of respect and trust on both sides
Uncompleted lease renewal negotiations with sitting tenants
Low levels of property maintenance and poor presentation factors in the common areas
A declining interest from customers locally in the property
A supermarket that was not improving sales and was worried about the future of growth
A landlord that was failing to get involved with the anchor tenant and its performance
What would you do with a property like this? Would you fix it, or would you let things ‘stagnate’?
Making decisions when required
So What Did I Do?
I chose to walk away from getting involved. A good move I think; there no point in wasting proven and intelligent investment strategies on property owners that continue to destroy a shopping centre and the tenant mix for the sake of aggressive rental payments.
What will happen now? It will become more of a ‘distressed asset’, and eventually, most of the tenants will probably leave. Will the landlord soften their stance on rents? They will likely have no choice if they want some reasonable chance of a property ‘turn-around’.
There is a key message here for shopping centre owners. Respect the important balance between customer engagement, leasing, property maintenance, the tenant mix, retail sales, property marketing, and anchor tenant support. That is the retail shopping centre equation to carefully nurture and grow if you want a successful shopping centre as an investment. Success is possible for any property investor if all elements of retail property performance are ‘balanced’.
Have you ever thought about what makes a shopping centre in Brisbane or Queensland so successful as an investment when other similar properties nearby are struggling?
There are generally a few things in the answer, including the landlord’s commitment to the property function and appearance, the tenant mix, the marketing program for the property and tenants, elements of community involvement, ongoing customer attraction, and the anchor tenant.
You could say that it is a special ‘retail formula’. It is a unique blueprint to balance and maintain; shopping centre managers and leasing specialists in South East Queensland know all too well the importance of the equation and the balance of it. Neglect one part of it and weaknesses can develop. A retail property can ‘degrade’ very quickly.
The Anchor Tenant Choice and Review
So, let’s look at the anchor tenant part of the equation. When it comes to the performance of a retail property, the anchor tenant selection and success will be fundamental to the performance of the property. On that basis, you should choose your anchor tenant with a view to the future of not just the property but also the community of customers.
The Leasing Review
Key factors to bring into the leasing decision in selecting an anchor tenant will be:
Required lease term (generally long)
Option term (also generally long)
Base rental or turnover rent provisions
The anchor tenant match to the customer demographic
Rent review alternatives over the lease duration
Marketing initiatives of the anchor tenant into the local area
Fit out designs and refurbishment covenants in the lease
Branding match to the property and signage for the anchor tenant
The integration of the anchor tenant into the property tenant mix
The lead time to exercise the lease option for the anchor tenant
Levels of trade expected and required for the success of the tenant
Anchor tenants can bring stability to your market rent levels and create lower vacancy factors. A retail property with a good anchor tenant will support the specialty stores and underpin the opportunity of retail trade for everyone.
So, a landlord should work closely with an anchor tenant in occupancy to ensure support and involvement in multiple ways.
Things to Check When Purchasing a Retail Shopping Centre
If you are looking to purchase an existing shopping centre with an established anchor tenant, ask these things as part of the due diligence process and lease document review:
The duration of the lease and the options
Critical lease dates relating to lease occupancy and enforcement
The levels of sales for the anchor tenant over the last 3 years
The marketing plans and campaigns underway at the property and for the anchor tenant
The dynamics of the anchor tenant and the specialty stores
The customer facts and figures relating to retail trading days of the week, the patterns to the visitor numbers to the property, and the seasonal sales throughout the year.
Information like this can help you understand the complete ‘dynamics’ of the retail property and its successes as an investment. Look for the strengths and weaknesses in every situation with retail trade, the tenant mix, and the property performance.
