- A property’s tenant mix is defined as the group of tenants that occupy it. In retail in particular, there is a significant amount of time and thought that goes into choosing this mix.
- A property with a good tenant mix is favorable for all. It works well for the retailers because it can drive higher sales and popularity. It works well for property owners because it drives higher rental income and allows them to re-lease vacant space faster.
- Tenant mix can be considered from two different perspectives: that of a developer looking to fill a space for the first time, or that of an investor inheriting an existing tenant base.
- There are a number of factors that must be considered when evaluating a property’s tenant mix including property location, competition, rental rates, and tenant preferences.
- However, choosing a tenant mix is as much art as it is science. To do it effectively, property owners rely on experience, instincts, and a proven track record of what works.
In our day-to-day lives, most of us probably go to a shopping center without giving much thought to how or why certain retailers came to occupy space within it. In reality, retail real estate owners invest a significant amount of time and effort to populate their properties with a mix of tenants who will serve the community, pay their rent, and have the best chance for success.
What is the Tenant Mix and Why Does It Matter?
Simply, a property’s tenant mix is defined as the group of tenants who make up a property’s occupancy. In most cases, this includes one or more “anchor tenants” that are big, recognizable brand names that drive traffic to the shopping center, along with a selection of smaller tenants with businesses that are complementary to that of the anchor(s).
To illustrate how this works, consider our own Kimberly Crossing shopping center, a 90,000 SF retail property located in Davenport, IA. It has two anchor tenants—Fresh Thyme Farmers Market and Planet Fitness—that lease 28,000 and 21,000 SF of space respectively (comprising 54% of total space). These anchors are surrounded by smaller tenants like Qdoba, Dollar General, Jersey Mike’s Subs, and Jujube Frozen Yogurt that complement the anchors. In this particular center, a shopper could go to the gym, grab some lunch, and pick up some groceries, all in the same place. This isn’t an accident.
A property’s tenant mix matters because it can have a significant impact on the success of the businesses within it. It can also be a major factor in tenant retention as well as the overall desirability of the property for future tenants. For example, it would be a bad idea for a property to contain 10 different coffee shops. It would be incredibly difficult for any one of them to succeed, and when each lease comes up for renewal, these tenants would likely leave for another center with less competition.
Tenant Mix Factors to Consider
Tenant mix can be considered from two different perspectives. First, a ground-up retail property developer may go through the tenant selection process from scratch; they have a blank slate and will try to choose the right mix for their specific property and community. Second, a retail property investor (like us) needs to consider a property’s existing tenant mix as part of the due diligence process, and they must continue to think about it every time they need to replace an outgoing tenant with a new tenant. In both cases, there are a number of important factors to consider in the tenancy decision-making process:
- Characteristics of the Surrounding Market: The income and demographic characteristics of the local market are one of the most important considerations to make. There must be a good fit. For example, a high-end grocery store such as Whole Foods or H-E-B may not be a great fit for a community whose income doesn’t support it.
- Competition: Property owners need to consider the competition both within the local market and within the center itself. Some companies like to be located in close proximity to their competition (have you ever noticed that CVS and Walgreens are almost always located near each other?) while others look for spaces where they can thrive on their own. However, within the property itself, retailers generally do not like competition (see the coffee shop example above).
- Lease Term: Some companies, usually larger ones, like to commit to a space for a long period of time, while others prefer shorter, standard leases. For example, an anchor store typically has a longer term lease than the supporting tenants. Knowing that the anchor tenant will be there for a long time provides the property owner with comfort and helps attract new tenants to the surrounding spaces.
- Merchandise Mix: Understanding the goods and services offered by each tenant is an important component of managing tenant mix. For example, a grocery store and a coffee shop have complementary merchandise mixes, whereas a grocery store and a golf driving range do not.
- Shopping Center Design/Theme: Tenants should fit within the overall design or theme of the shopping center. For example, an open air shopping mall would be a good fit for companies like restaurants and bars that are able to capitalize on the outdoor space. But, they may not be such a great fit for electronics stores or department stores that need ample indoor space.
- Transportation & Parking: Some retail tenants, like grocery and home improvement stores, require more parking spaces than others, like a quick service restaurant. As such, the number of available parking spaces is an important consideration in the overall mix.
- Cost vs. Rental Rates: The cost to build, acquire, and operate a shopping center has a significant impact on the rental income that must be generated from it. For example, an expensive property in a high-traffic urban location has to generate more rental income than a moderately priced property in a suburban location. As such, more expensive properties tend to have higher-end tenants who are willing to pay higher rental rates.
- Company Preferences: Some companies, usually bigger ones, devote a significant amount of resources to market selection decisions. They have their own criteria and actively seek out the markets that appeal most to them. Unless they are actively looking in the market that the property is located, they may be tough to land as a tenant.
Creating a strong tenant mix is as much art as it is science. Those who do it best rely on their experience, instincts, and a proven methodology to create a valuable asset for the community and for their investors.
Interested in Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. We leverage our decades of expertise and our available liquidity to find world-class, multi-tenanted assets below intrinsic value. In doing so, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
When evaluating potential properties for purchase, we always review the existing tenant mix to ensure it fits our investment thesis.
If you are an Accredited Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.
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