Retail Space and the Changing Landscap

Retail real estate is a commercial segment of the real estate market which has seen some significant changes over the last couple of decades and will continue to for the foreseeable future.

What is Retail Space?

Retail space is defined as a property used for marketing and selling goods and services directly to the consumer.  As we are all aware, products are more likely delivered to your front door these days as opposed to consumers heading to a retail store or mall to purchase them.  This is a significant reason for the expansion (on steroids) of distribution centers.  With that said, there is still a large market for retail real estate, but it is evolving.

As large retailers are scaling down the size of stores and inventory at retail centers, businesses that started as strictly e-commerce are creating brick and mortar retail stores.

Why and How is the Retail Real Estate Market Evolving?

Technology and consumer experience are the main driving forces behind retail space in today’s growing e-commerce world.  As large retailers are scaling down the size of stores and inventory at retail centers and ensuring they have an online retail presence, businesses that started as strictly e-commerce are needing to expand to create brick and mortar retail stores that will allow their merchandise to be seen, touched and then ordered online. The e-commerce retailers Allbirds and Warby Parker, for example, have developed retail spaces to cater to customers who still want to try it before they buy it. So, though retail space is changing, it is far from a dead market.

Choosing a Retail Location

Location has always been a key to retail space and the old adage location, location, location has never been more critical than it is today.  It’s no longer necessary to go out to go shopping, so if people do go shopping they want it to be an experience, not a chore.  Being located where other things may also draw in customers is an element of finding the right location.  If the site drives the traffic, the retailers marketing cost could be lower because, if the retailer is in a more isolated location, they will have to use marketing to drive traffic to them.  This means if you are considering buying or building retail space, you need take into consideration who would be the best-suited tenant.

Types of Retail Real Estate Leases

There are various kinds of commercial leases that are used for retail space, but the two most common are a Percentage Lease and Triple Net Lease.

Percentage Lease

With a Precentage Lease, the tenant pays base rent and, in addition, a percentage of the business monthly sales volume (once a sale threshold is reached).  Seven percent of sales is a common percentage, but everything is open to negotiations.  Why would a retailer seek out this kind of a lease?  Often retail outlets rely on seasonable traffic – vacation areas, holiday shopping, etc. The percentage lease is best-suited to these kinds of retailers and allows them to have a lower rent which is helpful during slower seasons.

Triple Net Lease

A Triple Net Lease puts the whole burden of the property on the tenant. What that means is a triple net lease includes expenses of the property – property taxes, insurance and maintenance (which can consist of repairs, operations, utilities, etc.).  The reason it’s referred to as net is because the tenant pays these expenses and typically receives a lower rent per SQ foot. Investors like them because this lease will usually create long-term stable income and possible capital appreciation without the concern for management and operations cost. If there are multiple tenants, the expenses are prorated according to square footage.

Retail real estate is a very diverse segment of the commercial real estate market and  e-commerce, with its growing market (15% of all retail sales), will continue to affect this segment.