Retail leasing has its own science and approach, and is a hot topic among our peers, tenants, landlords, and, most importantly, the factors that affect each of the stakeholders who have direct or indirect impact on value in the leasing market. Though often overlooked, the unique complexities of each property type demand specialized knowledge.
How can we effectively evaluate a retail unit using the same criteria as residential, office, or industrial properties? Recognizing and understanding the distinct metrics and market dynamics specific to each property type is essential for informed decision-making in our industry.
The retail leasing process is comprehensive, involving numerous steps from the initial viewing of the property to the final signing of the lease. Typically, the landlord's property manager acts as an intermediary with the tenant throughout this entire process. As the executor of the landlord's vision and bound by the landlord’s goals and objectives, the property manager's role is to prepare the property to meet these expectations—which may differ significantly from market standards.
Alignment with market dynamics and industry best practices, along with setting realistic financial objectives for the property, is essential. Without this alignment, the efforts to market the property and manage tenant relationships could lead to a series of uninformed decisions or a list of unresolved issues, leaving the property manager and other stakeholders in a challenging position. On the flip side, tenants, whether entrepreneurs or established brands, are often sold a vision of the property that, while potentially achievable, may fall short due to misaligned landlord goal and objectives.
Moving along. The retail leasing sector presents distinct challenges and opportunities. Within this framework, the property manager plays a crucial role in collaborating with the landlord to align their goals and objectives. This strategic alignment typically begins with a thorough understanding of the market, selecting an optimal tenant mix, and developing a robust leasing strategy that includes setting appropriate rental values, estimating service charges—often referred to as "common area maintenance"—and incorporating other essential commercial lease components.
Additionally, tenant promotion and marketing fees may also be included in the payment schedules. Each component requires a detailed assessment and a structured approach to ensure the rent is optimized, adhering to the best industry practices for rental valuations and other factors. Despite diligent efforts to tailor leasing strategies to current market conditions, predicting rental values involves inherent uncertainties. Below are two contrasting views of leasing retail properties.
Here is a common perspective:
Rental income from residential properties typically offers a stable revenue stream, characterized by predictable increases planned over multiple years. This stability is largely due to the fixed nature of residential lease agreements, which often include predetermined rent escalations.
Versus a more accurate point of view:
Rental income from commercial tenants, such as retailers, is more dynamic and can fluctuate significantly. These variations are largely due to the specific terms negotiated in each lease. For instance, commercial rents often incorporate percentage leases, where the rent is partly determined by the tenant's sales performance. Additionally, economic conditions play a pivotal role in shaping rent adjustments and overall lease terms in the commercial sector, introducing further variability into the income derived from these properties.
Finally. Decision-making in leasing involves not just choosing the right tenant or the right property, but also determining the appropriate lease terms based on comprehensive market analysis and property valuation. For landlords, informed decisions can optimize investment returns while maintaining the property's competitiveness.
Property managers often recommend courses of action, including those pertaining to property valuation and market positioning, which are vital in setting realistic and profitable rental rates. These decisions and recommendations must be based on accurate, up-to-date market data and a deep understanding of both the macroeconomic environment and local market conditions.
About the author, Muhammad Jawad:
With over a decade of leadership experience in real estate, Jawad is a pioneer in the UAE market, holding the distinction of being the region’s first CPM® (Certified Property Manager®), a certification from IREM® (Institute of Real Estate Management.) As a Chartered Commercial Real Estate Surveyor (MRICS), his expertise spans commercial and residential sectors, where he’s known for a customer-first approach and driving progressive change. Beyond managing, Jawad imparts his substantial knowledge as an IREM faculty member in the UAE, nurturing emerging talent. His commitment to excellence in real estate management has earned him international acclaim, including the 2023 IREM REME Award for Excellence in the Individual category.