At any one time, across the country, there are numerous businesses looking for small retail space to rent. Competition can be strong for preferred retail locations, not only from small and medium sized local businesses but, perhaps, from some of the national and international retailers.
Many retailers are, therefore, vying for the same locations which are right for their businesses to help maintain their profitability and sustain growth.
As a result, given the competition from amongst retails looking for prime, small retail space to rent, it’s not always that easy to secure the ideal space. Accordingly, an effective strategy needs to be devised and implemented to make sure you can lease the space you require.
So, let’s have a look at some of the key points to consider when looking to rent small retail space.
How do I find small retail space for rent?
An obvious first question, the answer to which depends on the time you have available to search for small retail space to rent, and whether you have the experience to do so.
If you choose to search for retail space yourself, then here are some ways to start:
- using a map of the town or city, or your local knowledge, identify the broad locations of interest and either drive or walk around the areas to see if there are any obviously vacant locations which might suit. There may be sign boards or contact numbers affixed to vacant stores;
- ask people from within your business networks (such as suppliers, local chambers of commerce or your lawyer or accountant) if they are aware of rental properties which may suit your business expansion;
- use a search engine to look for “small retail space for rent” in your local area to check availability. You will see sites such as Loopnet, Crexi, Showcase, and propertyshark. Searching online can be a good place to start to get a general idea of vacancies however keep in mind much of the data is often inaccurate, outdated, or does not list all the info needed to make an informed decision.
- search through some of the commercial brokerage sites to find small retail space for rent in the areas you want to consider, assemble the information and arrange to go and view those properties which appear to have potential.
Alternatively, and almost certainly a more effective approach in getting results and helping you find the right small retail space to rent, is to engage a “tenant representative”.
A tenant rep is a commercial real estate broker who specializes in working on behalf of the tenant (not the landlord), and will undertake both a search for property and negotiation of the lease terms and conditions.
Apart from the obvious, significant time savings, not only are you getting professional advice and the benefit of the tenant rep’s experience, but the broker:
- will know all about the supply and demand situation in the markets/locations you are looking at;
- may know about small retail properties to rent which are not openly being advertised as on the market;
- have a larger network of landlords and owners, so they’ll be aware of more rental properties to rent;
- may have excellent negotiating skills and be able to secure better rental terms and conditions for the rental space you choose;
- can access commercial property subscription-only sites, which aren’t available to the general public
The cost to use a tenant representative is zero. You pay nothing to your agent and they represent your best interests in the search, selection, and negotiations. Landlords pay full commissions to their agents regardless if you have representation or not.
Some things to consider when businesses are looking for small retail space
Of course, before you determine the preferred way to find new small retail space, other issues have to be addressed or considered, and these include:
Size of the space required
- should the new space be the same size or larger than what you have now and allow for future expansion if business goes well?
- what’s the minimum sales area required? An often-used formula for working out how much sales space per square foot is needed is: Sales Per Square Foot = Sales / Square Feet of Selling Space;
- is a large stockroom needed?;
- are on-site bathrooms, a small office, staff break/recreation area required?
Finding the right location can make or break a business, so some key requirements should include:
- good visibility to passing pedestrians and, ideally, vehicle traffic (unless in a shopping mall);
- close to major highways or public transport services and with good accessibility to parking;
- near direct competitors;
- close to complementary businesses so that some synergy can be created with other comparable businesses;
- in a safe, well-lit area
Rental Terms and Lease Conditions
Having a reasonable rental is one thing but, if certain lease terms are onerous and/or unreasonable, this will affect the overall performance of your business and may cause issues during the lease. Some other things to consider:
Condition of the space at handover
is the space in bare shell condition or partially or fully fitted out? Clearly remodeling costs can be significant and, if any savings can be made if parts of, say, the existing lighting or ventilation system can be reused then this is a positive. Tenant improvements will be a lot more expensive if building out a space from shell condition than if doing so in a 2nd generation space.
Apart from the monthly lease base rate and, depending on the type of lease agreed, the following costs will need to be budgeted for:
- common area maintenance fees for shared amenities such as security, parking, and fire prevention, possibly for common marketing if in a shopping centre;
- utilities such as electricity, heating costs, water, sewer, and internet;
- insurance for items such as theft, water damage plus public liability;
- taxes on occupancy/property taxes which may vary accruing to the city/state.
What percentage of sales should rent be for small retail space users?
Rent is almost always calculated by reference to the square footage occupied by the tenant. However, there may be some variations to this depending upon the property occupied, the landlord and the nature of the business.
Some examples of the variations which tenants may agree to pay are:
- a low base rent plus a % of the sales turnover;
- no base rent and a turnover rent only; this may be for businesses with high volume, and which are particularly attractive to the landlord, such as fast food businesses.
However, generally tenants allocate 3% to 10% of gross monthly sales to lease rental payments, with some typical examples as follows;
- electrical and appliance stores 2.0-2.5%
- general merchandise stores 3.5-4.0%
- food and drink shops 5.5-6.0%
- fashion clothing and accessory shops 7.5-8.0%
What is the most common type of lease for a retail property?
Different landlords will offer variations on a standard lease and for different periods of time. The key distinction is the costs that each party is responsible for. For example:
- single net lease: tenant pays property tax and utility bills; landlord is responsible for all other costs including insurance;
- double net lease: tenant pays property taxes, utilities, and insurance, the landlord pays for maintenance;
- modified net lease: expenditure is divided between tenant and landlord;
- triple net lease: the most common type of lease for small retail space where tenants pay most of the expenses and the landlord is only responsible for structural repairs.
Leases also vary by duration and may be:
- short term leases of between 1 to 3 years;
- standard term leases of between 3 to 5 years;
- long-term leases from anywhere over 5 years up to 10 years (although major retailers can often secure 25 years + leases)
Some leases have an “option to renew” included which gives the tenant the right to further extend the lease, perhaps on pre-agreed terms, provided the terms and conditions of the initial lease have been complied with.
How do you negotiate a lease for retail space?
Once suitable premises have been identified, negotiations to secure the best leasing deal for your business can commence.
With assistance from a tenant's rep to give advice on the key commercial terms, such as the rent and lease duration, the basis of the lease can be agreed. The tenant’s rep will be able to negotiate on rent, the rent-free fitting out/remodeling period (if any), liability for repairs etc. However, as the lease is a legal contract, it’s also wise to engage a commercial real estate lawyer to advise on the legal implication of clauses in the lease and whether there are any provisions that could be detrimental to your business.
As with many other matters relating to business, it’s best to rely on professionals such as a tenant’s rep to seek and secure small rental space to rent.
Not only will this save costs over the longer term but will leave the tenant ample time to do what he/she is best at, namely devoting energy to operating and growing their business!