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Analyzing the leasing criteria of retail tenants.

In order to be more effective property managers, leasing brokers and developers of small retail centers should be aware of current and potential tenants' demands, attitudes, and preferences when they select retail space. These factors, otherwise known as "psychographic characteristics," include driving time between center and home, the surrounding businesses, amount of rent, terms of the lease, tenant mix, and a variety of other elements that influence how well a particular center is perceived to fit the tenant's desires and needs.

For a property manager attempting to increase occupancy, asking key questions relating to these psychographic characteristics will help sell potential tenants and avoid losing current ones. A questionnaire (Figure 1) may be constructed to learn more about users of small centers and what search process they used to select their present location.

This article presents the responses obtained from face-to-face interviews with tenants in centers under 20,000 square feet.

The selection of the centers was random within three geographic zones modified in order to survey retail centers with and without the amenities so that comparisons could be made.

Amount of square footage

Users seemed to select the amount of square footage they occupy for many reasons. The lessee may have a business plan suggesting a precise amount of square footage that will optimize returns. Other tenants may not initially be in a financial position to lease the amount of space they would like. Some users just need more or less space for display or storage purposes.

Overall, 43.7 percent of the respondents leased 1,500 square feet or less, 23.9 percent leased between 1,500 and 2,000 square feet, 21.8 percent leased between 2,000 and 3,000 square feet, and 10.6 percent leased between 3,000 and 10,000 square feet.

A total of 89.6 percent of the users surveyed leased 3,000 square feet or less. The typical lessee may own a sandwich shop, a gift store, a check cashing outlet, or a car stereo shop.

Monthly rent

The marketplace will generally set competitive rent levels at a price that is comparable to centers of like construction, quality, and accessibility.

Our survey revealed that the largest group (29 percent) of tenants paid between $0.75 and $1.00 per square foot per month. The second largest group (26.1 percent) paid between $0.50 and $0.75, and 21.7 percent paid $0.50 or less. This indicates only 22.5 percent of the tenants paid more than $1.00 per square foot.

Once the user has identified an acceptable level of rent, the next determination is the term of the lease.

Years at present location

The focus of this question was not intended to determine how long the lease term ran, but rather how long tenants have been at their present location.

The responses given ranged from one to 15 years, with the largest group (17.8 percent) having been at their location for two years, 14.1 percent for three years, and 11.9 percent for five years. In total, 73.3 percent have been at their present location for seven years or less.

As competition increases, tenants are forced to position their businesses to increase sales. If a better location is available, providing greater visibility and accessibility, tenants will be more inclined to analyze the benefits of moving.


After the rent, expenses constitute the greatest concern for tenants. The more expenses the tenant pays, the more he or she bears the risk of inflation.

Of 139 responses, 47.5 percent of the tenants paid the ad valorem taxes themselves. The remaining 52.5 percent had leases under which the lessor paid the real estate taxes.

Of 141 responses, 57.4 percent of the tenants paid a pro-rata share of the insurance costs.

Of 121 responses, 81 percent of the tenants paid a proportionate share of the common area maintenance expenses. The remaining 19 percent had leases calling for the lessor to pay for common area maintenance.

Number of centers looked at

Many potential clients will focus on the area in which they wish to locate their businesses and then narrow their choices after evaluating the various qualities of competing retail centers.

It is interesting to note that 80 percent of the respondents looked at five or fewer centers before leasing their present location. This reflects a better than one-in-five close rate.

Although 20 percent of the respondents looked at five or more centers, the fact remains that a majority will lease space before seeing the sixth center. As a property manager or leasing broker, ask how many other centers your client has visited; if they have seen more than five, it may very well be time to clarify their needs. As a leasing agent, this simple question will save time and effort for both the client and yourself.

Driving time to work

Once a decision has been made to become self-employed, most people want to have their businesses as close to home as possible. This saves time, cuts down on traffic-related stress, extends the life of one's car, and saves money. Our survey indicated 53.5 percent of the tenants drove 10 minutes or less to work and 92.3 percent drove 30 minutes or less.

Proximity of competition

It is not unusual for competing businesses to concentrate in a particular area or part of town. Used-car dealerships often epitomize this concept. Prudent businesspeople know where their closest competition is located and will make every attempt to gain a locational advantage.

It is not surprising that almost half (49.3 percent) of the respondents' competition was within one mile of their business locations. An additional 15.9 percent of the respondents had competitors within two miles.

In total, 86.2 percent of the respondents had competitors within five miles of their present location. Having knowledge of the location of competing businesses within an eight-mile radius of the retail center is advantageous to both manager and brokers in pinpointing prospective tenants.

Weighing the factors

Thus far, we have provided insights relating to psychographic characteristics of potential and current retail tenants. Our next goal was to determine the importance of certain amenities and factors when one is seeking a business location.

We listed 21 characteristics that we felt were relevant to the selection process and asked for responses ranging from "very important" to "did not even think about." This information is critical to efficient use of leasing time. For example, if a prospect gives a high importance to parking lot lighting, then you should show centers with good lighting.

See Figure 3 for a summary of the importance responses.

* Driving time to your home. As mentioned previously, driving time is a consideration that is taken seriously. It is not surprising that 26.2 percent called drive time "very important" and 46.8 percent called it "somewhat important."

* Exact location. Part of the renting decision process includes the exact location available at a given time. Not surprisingly, 48.2 percent felt exact location was "very important," and 44.6 percent felt it "somewhat important."

* "Surrounding" businesses. Overwhelmingly, 70.2 percent of the respondents selected "very important," and 23.4 percent selected "somewhat important" when asked about proximity to competition. This reinforces the belief that users are concerned with the surrounding businesses.

* Nearness to freeway. Only 16.9 percent considered proximity to a freeway "very important," but 50 percent called it "somewhat important." The fact that the questionnaire was designed for small centers in neighborhood areas may be the reason that nearness to a freeway was less significant to tenants.

* Side of street. Interestingly enough, concerns about the side of the street on which the center was located were closely distributed among the first three responses. In fact, 34.8 percent responded with "very important," 32.6 percent with "somewhat important," and 29.8 percent with "not important."

* Traffic counts. Obviously, the more exposure a center has, the better the chances of having "stop by" business. Thus it is not surprising that 47.9 percent of the respondents felt it "very important" and 45.7 percent felt it "somewhat important" to have high traffic counts at the center they chose.

* Tenant mix. The mix of a center is of interest because it relates to complementary and supplementary drawing power. Our survey found that 61.4 percent felt tenant mix was "very important" in selecting a center, and 30 percent felt it was "somewhat important."

* Architectural design. Tenants like good-looking centers. In fact, 37.3 percent of tenants surveyed responded that architectural design was "very important," and 47.2 percent responded that it was "somewhat important."

* Signage. Regardless of the products they sell, retailers are concerned that their customers can see their sign. Overwhelmingly, 69.7 percent said signage was "very important," and 22.5 percent said it was "somewhat important."

* Age of center. This may or may not be of concern to tenants. However, our survey indicated 19.1 percent felt it is "very important," 53.9 percent felt it is "somewhat important," 18.4 percent felt it "not important," and 8.5 percent "did not even think about" it. It is probably more of a concern to those tenants paying their own maintenance than those who have it included in their base rent.

* Length/width ratio of space. Among tenants, 27.5 percent said the dimensions of their leased space were "very important," while 61.6 percent said it is "somewhat important."

* Number of parking spaces. Most cities require retail outlets to have a certain minimum ratio of parking spaces to square footage of retail space. However, 53.5 percent of the respondents selected "very important," and 31 percent selected "somewhat important," when asked about parking availability.

* Lighting in parking lot. Lighting in the lot as well as the visibility of the center at night is probably considered a safety issue with most tenants. A total of approximately 88 percent thought it was important and, more specifically, 47.9 percent felt it was "very important."

* Ingress and egress. The ease of ingress and egress to and from the property TABULAR DATA OMITTED TABULAR DATA OMITTED has proven to be highly significant to some businesses in the past. Our survey indicated that 31.4 percent of the tenants questioned considered this factor "very important," 55.7 percent "somewhat important," and only 10.7 percent "not important."

* Layout of parking lot. The layout of the lot ranked highly among tenants: 22.1 percent felt it was "very important," and 57.9 percent felt it "somewhat important ." The importance of the layout is similar to that of the ingress/egress to the property. If a parking lot's layout is awkward, it may hinder business by frustrating potential customers.

* Owner's attitude. This question dealt with the owner's attitude. But because managers are often seen as an extension of the owner, their attitudes may significantly affect the perception of the tenant. Landlord attitudes were "very important" to 58.5 percent of the survey respondents, while 28.9 percent felt them to be "somewhat important."

* Type of lease. There are several aspects to the terms of a lease. Who is expected to pay the taxes, insurance, and maintenance? Is it a gross lease, a percentage lease, or some form of triple-, double-, or single-net lease?

Users are very concerned with the characteristics of the lease. This is evidenced by the fact that 57.1 percent selected "very important" and 41.4 percent selected "somewhat important."

* Terms of the lease. The lease term is perceived primarily as the length of time the tenant is financially obligated. Of the respondents, 57.9 percent saw this as "very important" and 37.1 percent saw it as "somewhat important."

* Amount of rent. Of the 21 factors, the amount of rent was the only category that all respondents answered as either "very important" (73 percent) or "somewhat important" (27 percent). This proves that in today's economy, holding down expenses is still a top priority.

* Rental concessions. These may lure potential tenants, especially in a time of high vacancies. Our survey showed 32.4 percent felt rent concessions were "very important," and 55.6 percent felt they were "somewhat important."

* Finish allowance. Generally, new tenants are looking for any opportunity to save money. If an owner will provide a certain dollar amount for finish out, this helps a new tenant's bottom line.

Almost 93 percent of those surveyed felt it was of importance to have a value attached to allowance for finish out.


Familiarizing yourself with the psychographic characteristics of retail users will enable you to assist your clients and make the most efficient use of your leasing efforts. Having the advantage of knowledge provides you with increased occupancy.

If you pre-qualify a prospect prior to showing the first property, you will know what is important and be in a better position to show properties with the desired features and to emphasize those features while on site. Understanding and meeting the specific needs of each tenant also can enhance the image of your particular center.

Charles A. Smith, Ph.D., is an associate professor in the Department of Business Management and Administration at the University of Houston--Downtown. He has taught in the areas of real estate, accounting, and corporate financing. Professor Smith is also an active appraiser of both residential and commercial property. He earned his Ph.D. from Texas A&M University.

Lloyd N. Garbarino, CREA, is a principal and real estate analyst with the Houston firm of Garbarino and Associates, Inc. He has taught real estate and economic and business management at several major universities. Mr. Garbarino holds a B.A. from Auburn University and an M.B.A. from Tarleton State University.

John Martini is a real estate agent with Trillium Development of Dallas. He was previously an agent with Hunington Properties in Houston. He holds a B.S. with a major in real estate from the University of Houston--Downtown.
COPYRIGHT 1992 National Association of Realtors
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Smith, Charles A.; Garbarino, Lloyd N.; Martini, John
Publication:Journal of Property Management
Date:Nov 1, 1992
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