Unlike other types of commercial real estate, retail space has it’s own unique set of guidelines that it follows. Instead of focusing on factors that primarily benefit the tenant and it’s employees, retail spaces are shaped around the need to make their shoppers happy. This change in focus creates a completely new set of metrics to consider:
Co-tenancy is perhaps the most important factor you can examine when choosing retail space because the businesses around you can help drive traffic to your space. This is why many coffee shops prefer to be located in a busy business district, or beauty salons prefer locations in close proximity to a women’s fashion boutique, because most people want to tackle as many errands as possible in one stop. The best centers offer a complementary mix of tenants that all share customers and help to feed business to each other.
Many successful retailers will tell you that the most important factor in determining the success of a storefront is by choosing a location that has a high number of cars or pedestrians (in urban settings) that pass by the site each day. And while it’s true that this number gives you a quick measure of your daily potential customer base, it’s important to keep in mind that high traffic counts alone are not going to get consumers to leave the main road, pull into your center, and get out of their vehicle to shop. Which is why examining other factors, such as great co-tenancy is so important.
Access measures how easy it is for a potential customer to get into a store. Typically, this will refer to vehicular access. Access is important because most consumers don’t like to go out of their way to shop and retail business owners want to make it as easy as possible for their customers to get into the center, out of their cars, and into their store to make a purchase. Factors such as: one-way vs two-way streets, median cuts, signalized intersections, and ample store surface parking or access to a dedicated parking garage for the center, are all things that should be considered.
It’s important to remember that the right shape and amount of store frontage can also help drive retail performance. Most consumers are going to form an opinion about a store based solely on what they can see through the windows of the shop without ever entering it. This is why many retailers prefer to lease spaces that are more wide than deep, giving them the maximum amount of window area to capture a consumer’s eye.
Occupancy Cost vs. Sales
In other forms of commercial real estate, all things being equal, you can compare occupancy cost to determine which sites are best. In retail, however, occupancy cost should be an expense that drives sales. Because of this, what you want to consider as you judge an existing space isn’t how much it costs. Instead, it’s how much of your sales it costs you. In other words, if a location that costs you $40,000 per year generates $1 million in sales (or 4%), it’s probably a much better deal than one that costs $30,000 per year but only generates $700,000 in sales. In that second space, 4.3% of your sales goes to pay rent, meaning that it’s about 7% more expensive than the first one, relative to its actual performance.