When evaluating a potential investment in a commercial retail center, one of the major points of consideration is the property’s anchor tenant.
In this article, we will describe what an anchor tenant is, why they are important, how they impact property performance, and what a good one looks like. By the end, readers will have the context necessary to determine if an investment’s anchor tenant adds to or subtracts from its risk/return profile.
At First National Realty Partners, we specialize in the purchase and management of grocery store anchored retail shopping centers. If you are an accredited investor and would like to learn more about our current commercial real estate investment opportunities, click here.
What is an Anchor Tenant?
An anchor tenant is one who leases a large amount of space in a commercial property. They are usually large, recognizable companies with broad appeal to the local population. In the types of commercial real estate we purchase, their presence is designed to attract shoppers to the center and to provide other tenants with comfort that the center is supported by a large company.
For example, our West Market Street Station property is located in Akron, Ohio and has 54,166 square feet of Gross Leasable Area (GLA). Of this space, a Whole Foods grocery store leases 30,173 SF, or 55% of the total square footage – which makes them the anchor tenant.
Because Whole Foods is a popular grocery store, it attracts a significant amount of shopping foot traffic on a regular basis. From this traffic, supporting tenants like PetPeople or LuluLemon hope that at least some percentage of shoppers decide to stop in their stores and buy something. We actually spend a lot of time thinking about a property’s “tenant mix” to ensure that supporting tenant businesses are complementary to that of the anchor. For example, at West Market Street Station, a shopper could get groceries, lunch, and a workout all in the same place.
Grocery Anchored Shopping Centers
An anchor store could be any kind of business. For example, in a shopping mall, an anchor tenant could be a department store like Macy’s, JCPenney, or Nordstrom. Or, in a center like the ones we invest in, they could be a grocer like Whole Foods or Trader Joes or a big box store like WalMart. We like Grocery Stores for a variety of reasons:
- Stability: Grocery stores sell food, which everyone needs, every day, to survive. As a result, there will always be a need for them. They have a stable consistent presence in the communities they serve.
- Consistency: Even in times of economic distress, everyone still needs to eat. As a result, grocery store sales tend to be relatively stable through all phases of the economic life cycle.
- Profitability: Because demand is consistent and stable, grocery stores can also be very profitable. This makes them a good bet to pay their rent on time, every month.
- Traffic: Because the grocery store is a place that people need to go once a week or more, they can generate strong foot traffic, which is beneficial for the other tenants in the center.
For these reasons, and others, we believe that grocery stores are good anchor tenants both now, and in the future.
Benefits of Strong Anchor Tenants
There are three notable benefits to having a strong anchor tenant.
First, they can reduce the credit risk associated with the property. By having a recognizable, national, profitable anchor tenant who poses little risk of defaulting on their lease payments, property owners can rest easy knowing that the income from their largest spaces is relatively safe. This is especially true for those anchor tenants who agree to long term leases.
Second, is the traffic that they generate. Large, well known, retail anchor tenants keep the parking lots full with shoppers who buy their merchandise. In turn, strong retail sales make an anchor tenant more likely to stay put for a long period of time and can benefit supporting tenants with additional sales of their own.
Finally, a strong anchor tenant can attract other strong tenants to a retail center. As a result, it means that the property can sustain higher levels of occupancy than those without a strong anchor tenant.
Why Investors Might Consider Anchored Shopping Centers
Given the benefits described above, anchored retail centers may be a good bet for certain real estate investors looking to invest in the retail space. They tend to offer stable, consistent returns, recurring cash distributions, and a gain on sale – which is where the bulk of returns are earned.
However it should be noted that not all anchored centers are created equal. The risk profile of a grocery store anchored center with experiential tenants like gyms and nail salons looks very different from the risk profile of a shopping mall with one key tenant and high levels of vacancy. For this reason, commercial real estate (CRE) investors should evaluate each anchored shopping center individually to ensure the risk profile is consistent with their own risk tolerance and return objectives.
Anchor Tenant Leverage
While the benefits of having a strong anchor tenant can be significant, it is also important to recognize that they have a significant amount of leverage over multiple aspects of a real estate investment. There are two that are notable.
The first is lease rates. The best anchor tenants know they are highly sought after, which can make for tough lease negotiations. Often, owners and operators of retail centers are at the mercy of what the anchor tenant is willing to pay and they must model supporting rents accordingly.
The second is vacancy. An anchor tenant leaving means that vacancy can increase significantly overnight and may stay that way until a new one can be found – which can be difficult. In the example property above, the Whole Foods anchor leases 55% of the total space. If they were to leave, 55% of the property would become immediately vacant and the resulting loss of rental income is material.
So, the important point here is that there are both risks and benefits to working with a major anchor tenant. The major downside is that they exert a lot of leverage over the negotiations and performance of the property.
Anchor Tenants & Private Equity Real Estate
Most anchor tenants are large companies that can be very difficult to access for individual investors. For example, if an individual bought a shopping center in New York on their own, they may not have the infrastructure or experience needed to negotiate or renegotiate a multi-decade lease with a major corporation.
For this reason, it can be helpful for an individual investor to partner with an expert, like a private equity firm, to invest in a shopping center with one more anchor tenants. A private equity firm has the resources and industry relationships to negotiate commercial lease terms that are favorable for both the property and its investors.
Final Thoughts
In a Commercial Real Estate context, an anchor tenant is one who leases a large portion of space in a property and whose presence provides visibility and stability.
Anchor tenants can be any company type or size, but we think that grocery stores are an attractive option because of their stability and consistency through all phases of the economic life cycle.
Strong anchor tenants come with a number of benefits including, lower credit risk, higher foot traffic, and the ability to attract other tenants to the property.
Because anchor tenants play such an important role in the success of a center, they can also exert a significant amount of leverage over rental rates and vacancy.
Because it takes experience and expertise to find and manage anchor tenants, it can be helpful for individual investors to partner with a private equity firm when making an investment in an anchored shopping center.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
