The Right Mix Of National Vs. Local Retail Tenants

CORONA DEL MAR, CA—A shopping center’s success is based on generating the best mix of retailers that are optimally aligned with neighborhood need and market opportunity, Hanley Investment Group’s president Ed Hanley tells Hanley and SVP Kevin Fryman recently represented buyer Westland Real Estate Group and seller (a private investor) in the sale of Seven Trees Shopping Center, a 150,338-square-footTarget-anchored shopping center in San Bernardino, CA, for $8.57 million. According to Hanley, approximately 93% of Seven Trees Shopping Center’s current tenancy is leased to national or regional chains including Target, Baskin Robbins, County of San Bernardino, Payless ShoeSource, Sally Beauty Supply and Waba Grill. We spoke exclusively to Hanley about the pros and cons of national-credit vs. local tenants in today’s shopping centers. Tell us about the pros and cons of national credit tenants vs. local tenants in shopping centers today.

Hanley: A high occupancy rate and stable tenants are vital to the shopping center’s success. A large percentage of highly rated national credit tenants will typically attract shoppers that will support the smaller tenants, spend more on advertising, and add value to the shopping center. A high credit rating is a good indicator that the tenant will most likely be able to pay the rent. As you might assume, the default rate for investment-grade tenants is substantially lower than that of tenants with lower ratings. Additionally, lenders are more comfortable lending money to an owner with a high percentage of investment-grade tenants. The cons are that national credit tenants might demand more lease concessions and tenant improvements and pay a much lower rent than a local tenant. Also, the national tenant typically requires a longer lease, which can lock in lower rents over time. Local tenants offer a unique offering of goods and services tailored to that specific market. How are today’s landlords viewing both types of tenants and strategizing with them to strengthen their shopping centers?

Hanley: Today’s consumers want a unique shopping experience. The term “experiential retail” has become a popular term. Mall and large shopping center owners are incorporating more dining options and specialty retailers and providing event experiences that increase visibility, engage the public, drive traffic, and keep customers coming back for more. Retailers and retail property owners that are consumer-centric and know how to use technology and are able to differentiate themselves will be the winners. Are there any new categories of retail tenants emerging?

Hanley: I think what is most noteworthy is that we are seeing more non-traditional type of tenants in retail environments like medical services, education, churches, and civic centers. The demand for convenient healthcare services, often referred to as the “retailization” of healthcare, is forcing health systems to locate real estate beyond the traditional hospital campus and medical-office buildings. For example, Kaiser Permanente, California’s largest HMO, recently announced a partnership with Target to open clinics in several of its Southern California stores. In certain markets, there is a third wave coffee movement happening that is giving Starbucks some competition. Although coffee is not a new category, it does point to the fact there are different types of coffee consumers who are supporting growth in a sector that seemed to be dominated by a few leaders. What else should our readers know about different types of tenants in shopping centers?
Hanley: The success of a shopping center is based on generating the best mix of retailers that are optimally aligned with neighborhood need and market opportunity. It is not only important to have just a food tenant but having “the right food tenant” could mean the difference between a vibrant center and one that has fewer customer visits.

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