Retail is a business that relies heavily on proximity to consumer base and visibility in order to succeed. The market is crowded, from corporate giants to locally-run shops; there is no reinventing the retail “wheel” anymore. So, when you’re looking to expand your small or growing retail business into a new space, you want to ensure you find the best options and properly weigh important factors before making your final choice.
Leasing a space is often the best option for growing retailers, as they allow new players to enter well-established, high-traffic areas quickly and leaves options flexible for further expansions. Over buying a new retail location, leasing one requires way less cash up front, and ensures any maintenance and repairs needn’t be on your radar. It allows you to focus on your business’ growth and retain the liquid resources needed to respond to new opportunities.
So, what are the steps to choosing the right retail space to rent and signing a lease that sets your business up for success? Here, we break the commercial leasing process down into 5 crucial steps:
Create a Comprehensive Budget
The first thing to do in any kind of real estate search is to create a budget. And in leasing a retail space, budget isn’t just rent and utilities; there are several other costs involved that can cripple your company expansion if you’re blindsided by them:
- Any renovations the space needs before you move in
- Extra costs associated with hooking up any specialized equipment
- Expenses related to the moving process itself
- Security deposit
- The possibility of high demand driving up the cost of rent
Depending on the type of business, you should look to spend about 5-10% of your annual profits on lease payments for the retail space. You can easily estimate if a lease payment for a potential space is healthy for your business by dividing the rent payment by your annual gross profit.
Calculate How Much Space You Need
Paying for space you don’t need can be just as negative for an expanding business as not enough. You’ll likely want to leave a small amount of room for growth and convenience, but you do not want pay extra for space you won’t be making use of. Sales per square foot can be used as a measure of potential efficiency while looking at retail spaces to lease. To calculate:
Divide your sales by your store’s square footage, including non-sales space such as storage and office.
By finding this efficiency rate and deciding what is right for your business, i.e. how much you’ll be making per square foot you’re leasing, you’ll be able to narrow down your search quite a bit.
Decide on Your Desired Locations
The more desirable a location, the higher the rent for a quality retail space is going to be. Also, the size of the spaces might be smaller than you need. It follows, then, that deciding on the optimal locations for your new retail location is a two-fold process of (1) specifying your non-negotiable criteria for the space, and (2) finding the top of the bell curve of location quality vs cost.
(1) What do you need in the space? Get detailed about it. Decide on desired:
- Parking and co-tenants
- Signage visibility
- Square footage
- Store frontage and road frontage
- What bathroom situations are acceptable (i.e. shared, private, employee-only, etc.)
- Whether you’re okay with/can afford altering/renovating a space
(2) At what point does desired location give diminishing returns? For example, how much is visibility and foot traffic worth, and at what point does higher foot traffic and complete visibility stop adding value and potential for your business? Do your research on the retail market in your desired locations.
When considering the location of the retail space you plan to lease, also consider the commercial “geography” of the area. Locate your business near complementary businesses that attract similar customer bases while offering different goods than your company does; it increases foot traffic and customer interest.
A few last, still vital, factors to consider in the location of your rented retail space are the zoning, building codes, and any building rules. Can your business operate to its best ability in this space? If your company continues to grow – for how long? And do your neighbors enhance or diminish the value of the lease to your retail business? For instance, some cities or neighborhoods have nuisance laws. Some buildings have stipulations like noise clauses in the lease.
Find the Right Commercial Real Estate Broker
At this point in the process, bringing in a broker who specializes in commercial real estate sales and leases is key to whittling down your list of possible spaces the right way. They can take your preparation and research into the real world and guide you through the most important steps after choosing the right retail space: negotiating and signing the lease.
Right now is an ideal time to work with a commercial real estate agent on securing a great retail space to lease, as last year, rent for retail spaces went down nearly 1% – the first time it’s dropped at all in nearly a decade.
The best commercial real estate brokers in your area will be part of a realty firm who is well-established in the region, with expertise on local commercial markets – both past trends and future projections. How have businesses like yours fared in the past in or near each potential space? The real estate development firm the broker works for should have a diverse portfolio of their own retail spaces for lease that they also provide in-house, comprehensive site management for.
The right management company should be able to offer advice for your growing business by comparing what they’ve seen through their experience, as well as showing you likely trends in the real estate market in the coming years.
When considering any commercial lease, working with a property sales broker who is local to your region is always the best route to go. You need someone with an understanding of the local economies’ activity and growth to help you optimize the location, appearance and sustainability of your company’s new retail space.
Do a Walkthrough of Each Potential Retail Space to Lease
All the research and numbers-running in the world won’t give you the tangible information you need about a space before you sign a lease. There is such a thing as not vibing with a space; once you visit it and look around the neighborhood and surrounding shops you might find that the space was only good on paper. As well, this crucial step will allow you to get introduced to co-tenants, observe foot traffic in real time, and confirm things like condition of the space, utilities, amenities, etc.
Can you picture what your business expanding in this property looks like? A newly leased space should give you a positive vision for the future of your business, lacking this it may not be the right place for you.
This step is also a great opportunity to ask your potential landlord any and all questions about the space, neighboring businesses, landlord background, etc. Commercial leases for retail spaces are often longer-term; you want to make sure the space is ideal for you and is something that will sustain your growth for a period of time. You also want to make sure you don’t spend 5 years leasing a retail space in a building with a nightmarish or negligent landlord.
Make a pros and cons list of each of your top picks with your broker – but listen to them when they tell you to make a decision quickly. Great retail spaces for lease in prime locations go quickly, and you don’t want to miss out on the perfect pick because you were indecisive.
Make Sure Your Lease Works for You
Negotiating your lease before you sign is another process that can be tricky. You want to make the lease as advantageous for you as possible, but you don’t want to get into a difficult negotiation and have another tenant swoop in. A few tips for negotiating the best lease:
- Longer lease terms often lead to more flexibility in price negotiation.
- Bidding wars are just as real of a risk for commercial retail leases as they are for purchasing desirable property.
- Choosing to undertake more maintenance and renovation responsibilities will lead to more flexibility in negotiating the price.
- Businesses who are growing quickly should be careful to negotiate early termination terms in their leases.
- Longer lease terms can make negotiation on annual rent increase more flexible.
- Packaging utilities into the rent payments on the lease may save you money on overhead long-term.
Not everything on a commercial lease for a retail space is so straightforward, though. You have to consider the ifs and whens, and include those in the lease if you want to protect yourself thoroughly:
- What happens when you want to leave the space?
- What happens if you go out of business and need to terminate the lease?
- Does your lease exclude you from personal exposure?
- What’s the policy for holdover rent if you overstay the lease on the retail space?
- Are you protected from your landlord defaulting on the building (nondisturbance clause)?
A quality commercial landlord will provide premium site management services and incentives like build-to-suit services for new tenants. Your real estate broker will know how to get you the best lease terms for your new retail space, and in as little as a few weeks, you’ve got a turnkey new space for your business and can hit the ground running.
Running the Retail Game
A company expansion is exciting – full of potential and hope for further business growth in the future. But even when you’re leasing a retail space instead of buying, you’re still pouring a lot of time, energy and capital into the process, and a few missteps could take down years of hard work. The right way to make sure you’ve got eyes on all these details and more, is to partner with the right commercial real estate brokerage. They’ll have the experience and background to understand what your business needs, help you understand what level of growth is possible in this new location, and the portfolio and local relationships to find you the best possible retail space for your business to lease.