By Jonathan Wigser, Executive Vice President & Chief Investment Officer
Are the tenants’ businesses optimally sized and are they in their newest prototypes?
The retail landscape is quickly changing, and brick and mortar businesses are revisiting their standard store prototypes to embrace eCommerce and provide their customers with a seamless experience in-store. The trend of personalization and the need to constantly remerchandise products are driving retailers to adapt their strategies to remain competitive. Interestingly, this is not limited to luxury retailers – for example, Dollar Tree has been modifying its retail store prototypes to incorporate a wider selection of fresh foods.
Back in 2015, JLL Retail stated in a report that the top 100 online-only brands would open 850 stores by 2020. This translates into the possibility of these retailers testing innovative and experimental ideas to optimize store layouts and in-store customer experiences. Casper, an online startup which sells mattresses, is one of them. In addition to its 19 pop-up stores in markets like New York City and San Francisco, the company CEO Philip Krim announced last year that Casper plans to open 200 stores over the next three years. These stores are designed to be a testing ground for the company to trial new products and see how customers engage with them. Subsequently, they will adjust the model of the stores based on customer feedback.
As a result, investors need to know the types of tenants’ businesses, and they also need to understand changing retail store layouts. Knowing the latest retail solutions and prototypes is instrumental to maximizing ROI, but equally important, enables investors to be ready to mitigate the risk of tenants that may want to downsize, remerchandise their stocks or leave the property.
Don’t forget to ask your operating partner how up-to-date they are with the retail store prototypes. Ask them how they plan to configure spaces to optimize store layouts and how often they conduct market research and due diligence on changing retail trends.
What are the physical conditions of existing vacancies and what is the true cost to retenant them?
The cost of installing a tenant can vary greatly; installation costs will depend on the condition and layout of the vacant space and the type of business being installed. In addition, it may be necessary to bring space up to current building codes (i.e. ADA compliant restrooms, fire sprinklers, etc.), potentially creating a material impact on the cost of installing a tenant.
In addition, construction costs continue to rise and tenant installation expenditures are greater today than even a few years ago. Therefore, it is important to your operating partner for the most up-to-date reports that contain detailed descriptions of the physical condition of all vacancies in order to accurately determine a construction budget.
Are tenants optimally placed?
To improve the profitability of a property, it is essential to determine if there is hidden value to be realized by repositioning or remerchandising a property’s retail mix. Factors to consider when planning to relocate tenants include business categories, tenant sales, and the direction of consumer traffic. For example, for a pad site located on the way to work, it makes more sense to target a coffee shop; if the pad site is located on the way home from work, a restaurant with a takeout window could be optimal.
There are also tenants willing to pay more for better access and visibility. Installing these tenants in outparcels or in spaces with convenient entryways, while moving low rent payers to less visible or tougher spaces is another way to maximize the potential of the property.
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