leasing a space in a shopping centre

The questions you need to ask before leasing a space in shopping centre.

In Retail Leasing by LibertyLeasing

Before committing to leasing a space in a shopping centre, there are several questions to ask the landlord. These are the questions that you want to ask to determine whether this in the right shopping centre for your business. These questions are your due diligence questions – and you ask before the negotiations around specific commercial terms begin.

What do the Foot Traffic, Car Park Ratios & Average Spend Statistics say about the Centre?

Landlords count the foot traffic and collect gross sales information. The foot traffic and sales performance is going to determine the level of success that your business can achieve in a shopping centre. That being that case, it’s critical you ask for, and analyse, this information prior to committing to a lease.

Various factors decide what we would consider to be ‘healthy’ foot traffic numbers. It is relative to location, the size and age of the centre and how many anchor tenants (Woolies, Coles, Myer, David Jones, Cinemas etc) the centre has secured.

If the foot traffic has recently increased, it can be caused by a variety or internal and external influences. Such as increased or improved marketing at the centre level, growth within the area that the centre is located, increases in discretionary spending etc. Try to get an understanding of the cause of the increase, and determine whether that driving force is sustainable or if it will continue to grow. This is where you also want to look at the car park numbers. How many does the centre have? Do they have any charging stations? A centre can only support further growth to the extent that its car parking will support it.

You also need to look at the foot traffic data for each entry point of the centre. Ideally, you want your store to be located at the entry point which receives the most traffic flow, or is otherwise going to have traffic generated by the flow of customers to an anchor tenant (like Woolies or Coles).

Key indicators for success will be steady or increasing foot traffic numbers, car park ratios and average spend per visit.

Any Upfront ‘Hidden’ Costs?

Once you’ve committed to leasing a space in a shopping centre, you’re going to conduct a fitout of that space. When the fitout commences tenants often discover additional costs that they didn’t include in their initial budget. Unless you negotiate otherwise, the most common costs are:

CATEGORY 1 COSTS: Category 1 costs relate to the preparation and installation of base building services. These are works that the landlord will carry out, but the tenant is responsible for paying.

HOARDING: When tenants conduct a fitout in a shopping centre, the landlord will erect hoarding around the premises so that the works-in-progress are not visible to consumers.

DESIGN REVIEW FEE: Tenants are required to submit fitout plans and specifications to the landlord for approval. They will charge a review fee ranging from $500 – $2,000.

ENVIRONMENTAL SUSTAINABILITY: Institutional landlords are investing heavily into producing clean energy and contributing to environmental sustainability. Yay! As a consequence though, there may be limitations on the types of material that you can use in your fitout. It’s important to understand these restrictions at the outset so that you can factor in any additional costs with your fitout contractor.

Do You Pay Turnover Rent / Percentage Rent on Your Online Sales?

Traditionally, a shopping centre lease will contain a turnover rent (or percentage rent) clause.

At an elementary level, a clause of this nature means that you will pay a percentage of your gross sales to the landlord once the total of your sales reaches a certain threshold. Ideally, you want to negotiate this out completely. In lieu of that, you want to ensure that any online sales you make won’t be captured by this clause.

This is a really important concept for retailers to understanding, particularly with the extraordinary growth of e-commerce.

The concept is so important that we’ve written a few articles about it. You can read more about what turnover rent is and how to negotiate it here and …. here.

Are There Centre Redevelopment Plans?

Centre redevelopments can cause significant disruption to the foot traffic of the centre, and consequently your sales. If there are proposed or planned centre works, then they will be disclosed in the lessor disclosure statement. It should set out the extent of the works, when and where the works will occur and changes to the car parking and/or surrounding road closures. You need to carefully review the proposed works and seek advice on the potential impact to your business.

Centre redevelopment works can mean 3 things for a business:

  • Relocation: The landlord relocates you to an alternative store in the centre, and you’ll enter into a lease on the same terms and conditions. Whilst noting that the retail legislation will require that the alternative store be comparable to the existing store, what is actually comparable in practice becomes arguable. You may end up in store that doesn’t particularly work for your business.
  • Demolition: The landlord can end the lease early because it needs to demolish your store in order to carry out the centre redevelopment, and it cannot locate you to an alternative premises.
  • Compensation: The retail legislation provides tenants with certain rights to compensation surrounding these events. This applies even if your business suffers a loss as a result of the centre works, even if you stay in the same store. It’s important to note that the compensation a tenant is entitled to can vary depending on whether the tenant knew of the proposed works prior to entering into the lease.

Do You Know Your Industry?

Profit margin, average occupancy costs, projected growth / decline etc. If you’re a small-medium size enterprise then these data points are not going to be the same as the major players in your industry. Ensure you research the numbers applicable for SME. When you have this data you can use it as a bench mark in the lease negotiations.

You also want to understand the anticipated changes and challenges facing the industry so that you can cater for them in your leasing strategy.

And finally, consider the external drivers for your industry. If a key external driver is discretionary income rates then compare that information with Australian Bureau of Statistics data to determine if its the best location for your business.

When Will The Current Leases at the Centre Expire?

Shopping centres generally have a renewal cycle. If the majority of leases are entered into in 2016 (e.g. after a development) then the large proportion of leases at the centre will be up for renewal in 2021. Before leasing a space in a shopping centre, get a title search and determine when the renewal cycle will hit.

It’s important to understand the renewal cycle for two reasons:

  • If the renewal cycle is soon, then the Landlord needs to secure a large amount of lease renewals simultaneously. This can create more leverage for the tenant.
  • If the renewal cycle is within the term of your lease, you don’t have any certainty over the tenancy mix in the centre. The tenants that currently surround your potential store may change. Or the landlord could introduce a competitor. Additionally, anchor or flagship stores that drive traffic to the centre may not renew their lease, ultimately impacting on your sales.

Has the Shopping Centre Innovated?

Upstairs at Toombul
Upstairs at Toombul, by Mirvac

As society continues to reply more on e-commerce, both retailers and landlords need to be innovative in order to keep the bricks-and-motar module successful. We see the most successful landlords do this by creating a destination and instagramable experience. For example, Mirvac created ‘Upstairs’ at Toombul.

The common area has interactive water fountains, egg chairs and neon signs screaming for a showcase in your instagram stories.

It’s also secured tenants like Archie Brothers, which have arcade games, a bowling alley and at atmosphere that will basically make you want to join the circus. The fancy kind. The Cirque du Soleil kind.

At their Sunshine Plaza Centre Lendlease secured Australias largest high ropes course. High Ropes Adventure Park allows participants (of a variety of ages) to travel more than 1km of ziplines and get a 360 degree view of the Sunshine Coast.

As part of its 2018 centre development Lendlease aimed to create a world class centre for dining and adventure. Not the traditional descriptions we hear for shopping centres – but we’re gong to need hear more of it.

High Ropes at Sunshine Plaza, by Lendlease

Both of these landlords not only created social media friendly common areas, but they are actively partnering with revolutionary retailers that drive traffic to the centre. Those retailers are offering an experience that can’t be obtained online, and if you’re a traditional retailer (clothing stores, bookshops etc) you will benefit from this. So before leasing a space in a shopping centre, ask about the landlord’s innovation plans.

How does the Landlord Market the Centre?

A shopping centre is a business. How successful that business is will naturally be impacted by marketing. Do some online investigation and analyse how the centre markets to their audience.

Look at the centre’s social media pages. Are they active? What is the audience size? Can you see evidence of the landlord partnering with tenants at the centre?

For example, a client of Liberty Leasing operates an Italian restaurant within a shopping centre. During the school holidays the landlord partners with them to run a pizza making class for children. They advertise this on their social media channels that has over 25,000 followers, with great engagement. This is the type of collaboration that you want to keep your eyes peeled for.

Key Takeaways

Naturally, you key takeaway from this should be ‘Boy, there is a lot to consider before leasing a space in a shopping centre. But I know more than I did before, and thats empowering’. đŸ˜‰

Our tenant representatives provide complimentary strategy sessions, and they know the shopping centre market. You can schedule a call (or discuss over email, if thats your preference) to get the down-low on a centre that you’re considering a relationship with.

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