The retail sector is a dynamic and ever-evolving industry that encompasses a wide range of property types. From grocery-anchored centers to regional malls, each category presents unique characteristics and considerations for investors and tenants. In this article, we will explore various types of retail properties, their stability, and factors that contribute to their value.
Grocery-Anchored Centers: The Pillars of Stability
Grocery-anchored centers are widely regarded as the most stable retail properties due to a fundamental truth: everyone has to eat. These centers feature a primary grocery store as their anchor tenant, drawing consistent foot traffic and providing essential goods to the community. The presence of a grocery store acts as a magnet, benefiting other tenants by increasing customer visits and overall sales.
Unanchored Retail: Small Centers, High Uncertainty
Unanchored retail centers consist of small clusters of local tenants without a dominant anchor store. These properties are often considered the least stable and are traded at higher capitalization rates (cap rates). Without a strong anchor tenant, these centers heavily rely on the local customer base, making them more susceptible to economic fluctuations and competitive pressures.
Neighborhood Centers: Local Hubs for Residential Areas
Neighborhood centers serve as convenient local hubs, catering to the surrounding residential areas. They may include a grocery store along with a mix of other retail and service tenants. Although not as large as regional malls, these centers offer a variety of goods and services, enhancing the convenience factor for nearby residents.
Power Centers: Attracting Shoppers as Destinations
Power centers are destination-oriented retail properties that typically house a combination of “big box” stores and smaller inline spaces. These centers are designed to draw customers seeking a wide range of products from well-known national or regional retailers. By offering a diverse selection of stores, power centers create a compelling shopping experience, attracting customers from a broader catchment area.
Regional Malls/Lifestyle Centers: Retail Experiences on a Grand Scale
Regional malls and lifestyle centers are expansive retail complexes known for their large-scale offerings. These centers often feature multiple anchor tenants, including department stores, and provide a diverse mix of retail, dining, and entertainment options. The focus is on creating a comprehensive shopping experience, blending fashion, leisure, and dining in a single location.
Tenant Credit: Assessing Financial Strength
Within the retail real estate landscape, tenants vary in their financial strength. Credit tenants, representing reputable and financially stable companies, contribute to the desirability and value of a property. The presence of multiple credit tenants enhances the attractiveness of a retail property to investors, as it indicates a lower risk of tenant default and potential vacancy.
Co-Tenanting Provisions: Driving Tenant Selection
Co-tenanting provisions play a crucial role in retail leasing arrangements. As retailers heavily rely on consumer sales, many seek to locate next to large, well-known tenants that generate significant foot traffic. These anchor tenants act as traffic drivers, benefiting smaller neighboring tenants. Lease agreements may include “go dark” provisions, allowing smaller tenants to terminate their lease if the anchor tenant vacates, ensuring they are not left isolated in the absence of a major traffic generator.
Go Dark/Recapture Provisions: Adapting to Changing Circumstances
Sometimes, retailers may choose to go dark intentionally, temporarily closing their doors to prevent competition within the trade area. In response, landlords include go dark/recapture provisions in lease agreements, giving them the ability to reclaim or reassign the vacant space to new tenants. These provisions allow landlords to proactively manage their property, ensuring a vibrant tenant mix and sustained foot traffic.
Percentage of Rents: Aligning Interests
In the world of retail leasing, landlords often structure lease agreements to include a percentage of rents clause. This provision allows the landlord to collect a portion of the tenant’s sales revenue in addition to the base rent. Here’s a closer look at the significance of percentage of rents and how it aligns the interests of both landlords and tenants.
Having a comprehensive understanding of the various types of retail commercial properties is crucial for investors and brokers alike. This knowledge empowers individuals to make informed and competent decisions when considering investment opportunities. Each property type presents a unique set of factors to evaluate, requiring careful analysis and the development of a tailored investment process. By equipping yourself with this understanding, you are better positioned to navigate the diverse landscape of retail commercial property and make sound investment choices.
For more information on Retail or other categories of commercial real estate, please contact us at Kaide Real Estate Advisors.
