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Location, Location, Location single

April 4th, 2013 by

Navigating the search for a retail location comes with plenty of twists and turns. My clients wonder why certain spaces are exponentially more expensive than others, when they appear on paper to be comparable.

When it comes to commercial real estate, the old adage holds true: location, location, location. Prime location drives up the cost every time. But location, in the retail property context, is more than just where the drop pin falls.

The value of retail space depends on its sale-generating potential. It’s more than just a place to live. It’s also a key component of the success of a retail business. What sort of community does your business need to thrive?

Your primary goal is to reach consumers and maximize sales. So the most basic element of the value analysis is to identify where your market lives, works, plays. The lifespan of your business will be short unless you find and follow your customers.

Second, ask yourself which businesses you will want as your neighbors. A well-balanced, well-merchandised center will command a higher rental rate. No retailer wants to think of its business as commonplace. So a retailer’s first instinct may be to run from competition and try to find a project in which its use will be unique. But it’s wise to temper this concern by considering the concept of synergy that is created when retailers of similar goods operate within a single center. Customers like convenience, choice and comparison shopping. The per foot sales of a shopping center that boasts all three will be higher, and the rental rate, a reflection of per foot sales, will also be higher.

Then, consider who you want as your neighbors. Who are the “anchor” store co-tenants that attract your customer base? Nearly all shopping centers, large and small, are anchored by big-name retailers, supermarkets, movie theaters, businesses that are large space users and are known to bring customers to the center. To attract the big names to the center, the landlord will make sweeter deals with the anchors than are made with the smaller retailers. And the cost of the sweet deal to the landlord is passed through to the smaller tenants in the form of higher rent. But it’s a cost that is often well worth the pain. Depending on how large the big-name tenants are, their drawing power can be significant. If you are a small retailer, a relative unknown, without your own following, or you have limited advertising dollars to spend, piggybacking on the reputation and name recognition of the anchor store can be an effective way to bring customers to your door.

In my next post, I will detail a few additional elements that will increase a space’s price. In the meantime, if you have questions regarding retail real estate law, you may always contact me at eminns@eminnslaw.com.

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