The shopping centre and retail property markets in Brisbane and Queensland are changing today, and that will reflect on how tenants create sales, attract customers, and grow their business over time. The internet and the ‘online’ side of things are now changing how property occupation works, retail sales, customer interest, and just what businesses need to lease premises successfully for the long term.
Many retail businesses today don’t need to lease as much space as previously required. Sales per unit of area are now an important equation to be monitored. It all comes down to a ratio of occupancy costs to Gross Turnover. Different businesses have different ratios and the averages for the retailer type are worth understanding.
Ratios of Rent and Occupancy Cost
Food type retailers tend to be at the higher end of the spectrum at around 15% to 20% of occupancy cost to turnover. Those landlords that are seeking higher rent, will push the ratio up for the tenant, and that is not always sustainable for the longer term.
Conversely at the other end of the ratio assessment, fashion type tenancies are now seeing their profit margins fall and turnovers reduce (all due to the internet and sales occurring online).
Given these problems, landlords would be well advised to manage their rents to realistic and not aggressive levels. It is better to have tenants paying a moderate rent for the longer term, than tenants closing their businesses due to lack of profit. The value of landlord and tenant relations should be understood and respected.
How a Landlord Can Work With Tenants
The extension of this is that a landlord should work with their tenants in a positive and consistent way. How can a landlord encourage positive tenant relations? Try some of these for starters:
- Regular meetings – this sounds logical, but it is surprising just how ‘random’ many landlords are with tenant contact. They let the contact go until something starts to pressure the tenant relationship or the occupancy. When the ‘pressure’ is on, lease negotiations are always harder, and the alternatives to solving a lease problem will be less for both parties.
- Create comprehensive leases that work for both parties – the lease document supports occupancy and income stability. When you look at it from that perspective, how a lease is created should be carefully considered.
- Clarify and control critical dates for all leases – this is a planning process of an advanced and positive nature. Critical dates coming up with any leases should be watched and tracked at least 18 months out from the ultimate date. That is how you can stabilize an investment property.
- Be flexible in tenant mix alternatives – if a tenant is under pressure, then look at the variables of expansion, contraction, or relocation. There are ways to solve a tenant lease problem related to local business pressure.
- Understanding property use – for the investment property to thrive over time financially, the use of the property must be optimized. There will be a balance between common areas, leased areas, car parking, and services. The owners of competing properties of the location will always be seeking to attract tenants. All the more reason to stay close to your tenant mix and property occupancy.
- Occupancy is not just about rent – collect a fair and reasonable rent for the property and the location. Aggressive and high rents force people away from a property. Look at the bigger picture of property occupancy costs including rent and outgoings. How do they compare to other properties in the location? Preserve your tenant mix by keeping occupancy costs in the ‘fair and reasonable’ zone.
- Negotiating leases early – if a lease matter is coming up (option or expiry), it is timely and sensible to negotiate any lease matter early. Don’t wait for the lease date to arise before you start discussing things with the tenant.
So, these are valuable ways to work with tenants and preserve lease occupation in commercial or retail property. Improve your investment property and stabilize it by negotiating with and consulting your tenants in a positive way. Their business success will be the foundation of your real estate investment and its performance.