Commercial Real Estate Retail Tenant Synergy

Tenant Synergy in Retail Commercial Real Estate

With ICSC’s annual RECon upon us, it’s about time to talk about retail tenant synergy. The original logic behind the large anchored mall was that people were unlikely to go out of their way to go to an in-line store, like a pretzel shop or a shoe store, but that they were willing to travel to go to a department store, like a Macy’s or a JC Penney. To take advantage of this, commercial real estate developers began building malls that had department store anchors at their corners and lots of little “in-line” shops in between. The department stores frequently got discounted rent, so it was a win for them, and the in-line stores benefited from having lots of “forced” traffic as people going between the department stores walked by. While the model of the mall has changed over the years, the concept of a synergistic relationship between tenants continues.

Retail Tenant SynergyLooking for more examples? Have you ever noticed that most neighborhood centers have a card store right near the supermarket? Or, for that matter, have you ever wondered why neighborhood centers typically have take-out focused restaurants like Chinese or pizza shops near the supermarket? It’s all about convenience.

What is going on here is that these commercial real estate owners have realized the benefit of synergy. Having tenants that fit well together is not only a way to keep their customers happy, but it is also a way to keep tenants happy. A dry cleaner located next to a supermarket, a card shop, a pizza parlor, a family haircut place and a day spa is very unlikely to leave. They benefit not only from their proximity to the supermarket but also from their proximity to other supportive businesses which make that center a one-stop shop. What could be a better place for them?

Retail Tenant Synergy Gone Wrong

On the other hand, commercial real estate landlords who get desperate can sometimes fail to achieve synergy. While this can be a way to keep occupancies high in the short term, it can generate greater vacancy down the line. Here’s a real world example of four tenants at a center in an overbuilt but demographically desirable eastern suburb of St. Paul, Minnesota:

  • High-end wine shop
  • Yoga studio
  • Gourmet food boutique focusing largely on cheese
  • Army recruiting center

I know of another center in an inner-ring northern suburb that has the area’s largest gun shop, a tobacco store, a rowdy drinking establishment and a large health clinic. It doesn’t have a pharmacy.

Over time, these centers will typically lose the tenant that doesn’t fit or will lose more tenants as their outlier tenant changes the nature of the entire center. While few commercial real estate marketing packages talk about this and many commercial real estate investment brokers are unaware of it, achieving tenant synergy is crucial for a retail center to be successful in the long term.

At SVN, creating synergy is a fundamental part of the principles that underlie our Shared Value Network℠. To learn more about how we help retail owners create markets for their properties, join us on our SVN | Live ℠ Open Sales Meeting.

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Understanding the Retail Anchor

If you attended this years ICSC RECon in Las Vegas then you know retail is on the tip of the tongue of every commercial real estate investor. With acquisitions high,  it’s important to understand retail CRE concepts. One of the most important concepts in retail property is the anchor.

What is a Retail Anchor?

retail anchorA retail anchor is a store or other tenant that drives traffic to a retail center or area.

While large shopping malls typically use department stores as anchors, most private commercial real estate investors buy smaller properties. These strip centers are usually anchored by a grocery store like Safeway, Kroger or Piggly Wiggly or by a drug store like a Walgreen’s, CVS or Rite-Aid. Anchored centers typically carry lower cap rates due to the fact that investors usually prefer them.

Many anchored centers are actually “shadow anchored.” This means that an anchor store is present, but is not a part of the center. A good example of this would be a strip center with a Target store. Since Target almost always owns their stores, the center is shadow anchored by the Target. You can buy the center, and it can benefit from the presence of the Target, but you won’t own the Target itself. If you are considering a shadow anchor center, make sure that you have a good understanding of where the shadow anchor actually is. I have seen brokers describe centers as “shadow anchored” when the anchor is located kitty-corner across a major intersection.

Anchored and shadow anchored centers are some of the best commercial real estate investments. They offer the stability of a large tenant combined with a diverse income stream. Many anchored centers also have a tenant mix which performs well in both up and down economies.

What do you think about anchored retail? Please share your thoughts below.

To read more on retail markets in the commercial real estate industry, download the 2015 Retail Market Update report here.