10 Things to Consider Before Leasing Retail Property

Published: 02-07-24    Category: Leasing/Renting

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

A retail shopping bag outside a store.

Finding the perfect retail space is crucial for the success of any business. Experienced retail tenants may think they've covered all the bases when leasing a new space, but it never hurts to remind yourself of what you may or may not already know.

That's why, here, we'll discuss ten important components of leasing retail property that both experienced and newer retail tenants should consider before signing on the dotted line.

From understanding common area maintenance costs to knowing about exclusivity clauses, these insights will help tenants make informed decisions and avoid potential pitfalls.

Let's get started.

What Are the Different Types of Retail Property for Lease?

There are several different types of retail property that tenants can lease, each with its own unique features and advantages.

These properties cater to various retail needs and play an essential role in the success of businesses.

  • Traditional shopping centers or malls: These large-scale developments typically feature multiple anchor stores as well as smaller retail spaces. Shopping centers offer a diverse range of products and services, making them attractive to a wide customer base. They often provide ample parking, amenities like food courts, and entertainment options, making them a convenient and enjoyable shopping experience for consumers.
  • Strip malls: These are smaller-scale retail properties that consist of a row of stores, typically located alongside a major road or highway. These properties generally have a mix of businesses, such as restaurants, salons, and convenience stores. Strip malls often benefit from high visibility and convenient access for customers, making them an excellent option for businesses aiming to target local customers.
  • Neighborhood centers: These centers are typically anchored by a large supermarket or grocery store and include a combination of national and local retailers. Neighborhood centers are commonly located in residential areas, making them highly accessible to nearby residents. This type of property caters to daily convenience needs, such as groceries, personal care, and small-scale services.
  • Outlet malls: These are a unique type of retail property that offers discounted products from various brands. These properties are designed as open-air complexes and usually consist of multiple stores clustered together. Outlet malls attract bargain hunters and brand-conscious shoppers looking for discounted prices on fashion, electronics, and home goods.
  • Mixed-use developments: Lastly, these developments combine residential, office, and retail spaces into one complex. Often located in urban areas, these properties aim to create a vibrant community with a live-work-play concept. Mixed-use developments provide a captivating environment for both residents and visitors and allow for a consistent flow of foot traffic for retail tenants.

Overall, the different types of retail properties offer tenants a range of choices to suit their specific needs and target markets. The selection of retail property depends on the nature of the business, target audience, location preferences, and overall strategic goals.

Pros & Cons of Leasing Space in Each Type

Leasing space in different types of retail properties can offer various advantages and disadvantages for businesses.

Here, we'll explore the pros and cons of leasing space in traditional malls, strip malls, neighborhood centers, outlet malls, and mixed-use developments.

#1 – Traditional Malls

One major advantage of leasing space in traditional malls is their high foot traffic.

Shoppers are drawn to these malls for a wide variety of shopping options, which can significantly increase the visibility and potential customer base for businesses.

Additionally, traditional malls typically have higher-end brand stores, which can attract a more affluent clientele.

However, leasing space in traditional malls is often expensive, and there can be strict lease terms and requirements imposed by mall management.

#2 – Strip Malls

Strip malls offer a more affordable leasing option for businesses. They are typically a row of connected retail spaces, often located near busy roads or highways.

One advantage is that strip malls provide ample parking for customers, making it easier for them to visit the stores. Strip malls also often have a diverse mix of businesses, which can generate cross-traffic and boost customer exposure.

However, strip malls generally have less foot traffic than traditional malls, and the lack of amenities like movie theaters or food courts may result in less time spent by potential customers.

#3 – Neighborhood Centers

These are smaller-scale retail properties located in residential areas. Leasing space in neighborhood centers allows businesses to tap into the local community, making them convenient for residents.

Customer loyalty and repeat business are common in neighborhood centers, as they offer daily amenities like grocery stores or pharmacies.

However, the limited size of these centers may mean fewer foot traffic and a narrower customer base compared to larger retail properties.

#4 – Outlet Malls

These are known for offering discounted prices and attracting price-sensitive customers. Leasing space in outlet malls can be cost-effective for businesses, as the rent is often lower compared to traditional malls.

The increased foot traffic from bargain-hunting shoppers can lead to higher sales volume. However, the discount-focused nature of outlet malls may affect the perceived brand value for certain businesses, and the competition among stores can be intense.

#5 – Mixed-Use Developments

Finally, mixed-use developments combine different elements like retail, residential, and commercial spaces. Leasing space in mixed-use developments provides businesses with the potential for a diverse customer base, as residents and office workers are often close by.

The convenience of having everything in one place can also result in increased foot traffic. However, leasing costs in mixed-use developments may be higher due to the enhanced amenities and the overall appeal of the location.

Each type of retail property offers unique advantages and disadvantages for businesses. Choosing the right property type ultimately depends on factors such as target customer demographics, budget, desired foot traffic, and specific business objectives.

That said, let's dive into the 10 things that both newer and experienced retail tenants should be the most aware of.

#1 – Common Area Maintenance (CAM) Costs

While experienced tenants are familiar with basic rental costs, they may overlook the common area maintenance expenses associated with retail spaces. CAM costs cover maintenance and repair expenses for shared areas such as parking lots, hallways, and restrooms within the shopping center.

Understanding the calculation method for these costs and negotiating a cap on increases is essential to avoid unexpected financial burdens in the long run.

#2 – Exclusivity Clauses

Exclusivity clauses are provisions within lease agreements that grant tenants the exclusive right to conduct specific types of business within a particular property or shopping center.

These clauses are crucial for tenants who want to ensure their business does not face direct competition from similar businesses within the same premises.

Conducting thorough market research and negotiating exclusivity clauses can provide tenants with a competitive advantage.

#3 – Lease Assignment and Subletting

When leasing retail property, tenants may not initially consider the possibilities of lease assignment or subletting. Unexpected circumstances, such as business growth or relocation, may lead tenants to explore these options.

Understanding the terms and conditions related to lease assignments and subletting can help tenants avoid potential legal issues and maximize flexibility in their lease agreements.

#4 – Renewal Options and Lease Terms

It is important for tenants to be aware of lease renewal options and the associated terms and conditions.

Some leases include the right to renew, while others do not. Understanding the renewal process, rent escalation clauses, and the possibility of negotiating favorable renewal terms is essential for tenants who anticipate staying in the same space for an extended period.

#5 – Building Restrictions and Regulations

Experienced tenants may overlook the specific building restrictions and regulations stipulated by local authorities or property management.

These restrictions can include signage limitations, operating hours, noise regulations, and more.

Understanding and complying with these restrictions from the beginning can prevent potential conflicts and fines.

#6 – Tenant Mix and Synergy

Being aware of the existing tenant mix within the shopping center or retail complex is crucial for both experienced and newer tenants.

Creating a complimentary tenant mix can attract a broader customer base and drive traffic to all businesses within the premises.

Understanding the target market of existing tenants and collaborating on joint marketing efforts can boost overall success.

#7 – Accessibility and Parking

Tenants might overlook the importance of accessibility and parking facilities, assuming they are mainly a customer concern.

However, limited parking spaces or complicated access routes can discourage potential customers and hinder business growth.

Checking for ease of access, parking availability, and potential congestion during peak hours is crucial for the success of any retail business.

#8 – Buildout and Improvements

Before signing a lease agreement, tenants should understand the extent of buildout and improvements they are responsible for.

Some properties may require significant renovations or modifications to align with the tenant's business requirements.

Negotiating favorable buildout concessions or discussing potential tenant improvement allowances can save time and money for entrepreneurs.

#9 – Human Resources Considerations

It is crucial for both experienced and newer tenants to consider human resources-related factors as they lease a new retail property.

Understanding local labor market conditions, wage laws, and proximity to potential employees can significantly impact business operations.

Being aware of these factors can help with workforce planning and avoid any surprises in terms of labor costs and availability.

#10 – Future Development Plans

One aspect that tenants may overlook is the possibility of future development plans near their leased space.

Understanding potential construction plans, road expansions, or neighboring developments can help tenants assess long-term feasibility and evaluate the impact on their business.

Staying updated with local development authorities and conducting due diligence in this aspect is essential for strategic decision-making.

Do Your Research & Consult Professionals Before Making a Decision

For both experienced and newer retail tenants, leasing a new space requires going beyond the basics and considering various hidden aspects.

From understanding common area maintenance costs to ensuring favorable lease terms, these ten considerations can help tenants make informed decisions and avoid potential pitfalls.

Conducting thorough research, consulting professionals, and negotiating lease terms can pave the way for a successful and prosperous retail business.

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