Finding the right retail space to rent takes time and patience. The space becomes an integral part of your brand and, of course, the location is crucial. Before you settle on a spot and open a storefront, you’ll want to front load the process with some strategic research and careful planning. The more planning you do now, the more you’ll set your business up for success in the long run.
Determining the ideal neighborhood, making sure rent fits your business budget, and estimating the proper square footage are all key steps. Here’s a smart guide to navigating the world of commercial real estate with a keen eye for detail and the right frame of mind.
Your retail space is an integral part of your brand image.
Define Your Budget
Every project begins with a budget, and knowing how much and the type of space you can afford up front can save a great deal of time and hassle. It’s prudent to keep your lease payment in the range of 3% to 8% of your gross revenue. The averages for each industry vary depending on the role the retail space plays in the overall business strategy. Electronics stores, for instance, typically put a lower percentage of sales toward their lease (around 2% on average) than clothing stores (around 8% on average). Calculate this percentage by dividing the annual rent payment on a space you’re considering by your gross annual revenue.
When evaluating the lease payment on a space, don’t forget to take the down payment into consideration as well. Here are some other rent-related ongoing expenses you’ll want to consider:
- property taxes
- common area maintenance (CAM)
Your share of the common area maintenance is one item to study closely in the lease as it can be an inconsistent expense that changes quickly depending on the terms.
One-time rent-related expenses to budget for are the down payment, deposits, and any broker’s fees you’re responsible for. By and large, broker’s fees are paid by the owner of the property (though they’re often passed on to you through the cost of the lease.)
Knowing your budget before you begin searching for the perfect space will save time and hassle.
Figure out How Much Space You Need
To determine your ideal square footage, map out the various workspaces and other areas that your store will require. Examples include the sales floor, inventory storage space, offices, kitchen, bathrooms, and dressing rooms. Now estimate your square footage needs for each one of those spaces and add together for your total square footage.
Traditionally retail sales floor space is calculated using industry research and this formula:
Planned sales volume / average sales per square foot in your industry = sales floor space
Making these calculations beforehand can help you pinpoint the properties that are the best match within your budget.
How to Pick a Retail Location
Picking the right location can seem like rocket science. In a simple world, you just need to be where your ideal customers are, or you need to make it easy for those customers to get to you. Once you have that covered and have narrowed down your choices to a few options, it’s time to drill a little deeper and do some comparison.
Start with the most straightforward comparisons first:
- Lease expense, including utilities
- Amenities available, such as security
- Parking availability and public transport nearby
The cheaper space is not better if your customers don’t have easy access to your store. Consider how customers will get to you and factor in the hidden costs of an unsafe area in lost sales.
Then move on to the more complicated comparisons:
- Size of the neighborhood/area and its demographics
- Surrounding businesses and the foot traffic they’re likely to bring
- Local Competition (consider both pros and cons of this)
- Compatible Businesses (think college and pizza shop)
If you sell to a targeted niche, you may not depend much on foot traffic, but it's still important.
Competition can mean a proven location in many cases, so it’s not always a bad thing. Businesses nearby whose services are complementary are worth their weight in gold. Also, businesses like a large supermarket that will drive a lot of foot traffic can be critical. This idea forms the basis of most shopping centers that have an anchor store on which the other stores will depend for traffic.
When you evaluate your lease expense, all of these revenue-influencing factors should be a part of the decision.
Scouting Spaces: How to Find Available Rentals
Above all, when scouting out potential spaces, always keep your ideal customer in mind. Are they the people you see shopping nearby or walking and driving past the site? Is this an area where they are comfortable spending time and where they already spend money?
Two online resources to help you with your search are CIML (Commercial Real Estate Listing Service) and City Feet, which can connect you to local brokers. A broker will also have access to databases such as MLS and is often able to streamline your search.
If you want to start out on your own, scout out your preferred neighborhoods and look for rental signs first, or search LoopNet online. You can certainly speak to landlords on your own and narrow down your search, but when it comes to negotiating the terms of the lease, a great broker can be invaluable.
A local broker can get you into your ideal space more quickly and with better terms.
Negotiating Lease Terms: What to Look For
Even if you’ll be working with a broker, it’s important to have a basic grasp on the types of leases and the language you’ll encounter during your search for property. Negotiating the most desirable terms depends on understanding the way a lease is written. Almost all aspects of a lease are open to negotiation, and much depends on the unique set of circumstances surrounding the landlord at the time you find the property.
Does the space need work? Will your business draw more foot traffic? Are you prepared to take out a long lease? All of these factors can work to your advantage. Many brokers will tell you that a tenant has more bargaining power than they imagine. Never underestimate your position in the bargaining process.
Here are the common types of leases that you’re likely to encounter:
- Net Lease:
Tenant pays rent plus some portion of taxes, insurance, and/or maintenance.
- Double Net Lease:
Tenant pays rent plus taxes and insurance.
- Triple Net Lease:
Tenant pays rent plus taxes, insurance, and maintenance.
- Fully Serviced (Gross) Lease:
Landlord pays the above costs, often raising the rent to compensate.
- Percentage Lease:
Tenant pays a base rent plus a percentage of monthly revenue. This is common in malls and some shopping centers.
The more you learn about lease terms now, the more profitable you're likely to be in the future.
Common Retail Space Lease Clauses
Although every word of the lease matters and can have far-reaching effects on your business, some clauses that you want to be especially aware of and may consider including are:
This clause allows you to close during the center’s normal operating hours without incurring fees and penalties as long as you’re still paying rent. A similar go-dim clause allows you to operate with a reduction in hours to save on expenses.
In simple terms, this clause allows you to cancel your lease or reduce your rent based on the actions of another tenant. For instance, if an anchor tenant moves out or fails to open for business by a promised date, you may be able to get out of the lease or your rent may be reduced with this clause in place.
This clause governs your ability to sublease the space without permission from the landlord. In the event that you move or go out of business, this can be another important clause to include.
This clause spells out your ability to choose the aspects of your signage and details any restrictions in place. Make sure to be aware of all restrictions and limitations, as well as any requirements related to your signage that might represent an additional expense.
Renovation clause or addendum:
This clause or addendum can ensure that the landlord follows through on specific renovations promised during the negotiating by listing them out in detail as a condition of the lease.
Know which clauses are in place in your lease to protect your interests and be sure to fully understand those that are in place to protect the interests of the landlord.
A terrific retail space in the right location with good lease terms will set you up for years of success.
When searching for the perfect property for your retail business venture, keep your brand and the customers that your brand was designed to serve in mind at all times. A good fit for your customers will be a good fit for your business.
Don’t let the terms of your lease or crucial clauses go unnoticed by you until it’s too late. Consider the importance of having a broker to help protect your interests and to explain every aspect of the lease carefully and clearly.
In this fast-paced and ever-changing world, location remains as important as it ever was to the health and well-being of a business. Plan for the right amount of space at a price that fits your budget from the beginning.
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