Commercial Real Estate Investing From A-Z Top 5 Tips For Negotiating Leases
What are the top 5 things you should keep in mind when negotiating retail leases? What kinds of tenants are leasing retail space today? Drew Kristol from Marcus & Millichap shares his insights.
You can read this entire interview here: bit.ly/3OwCHub
What is the state of retail right now, and what kinds of tenants are leasing a space?
Florida came back very quickly after COVID, we have a government that is very pro business and has done as much as they can to try to encourage people to get outside and shop. There has been a lot of business occurring in Florida, whereas some other states have been locked down and not encouraging the amount of outdoor experiential shopping. Marcus and Millichap had its all time greatest year in 2021, with $90 billion worth of sales. Our previous high was $45 billion, and we’re actually ahead of the sales this year compared with the previous year. I think the main reason is that there has been a lot of real pent up demand in the retail market, and we are seeing returns that are a lot better than other product types. What do we mean by product type? Multifamily, industrial, office, retail land, those are really the major product types.
What are the five most important things that retail investors should keep in mind when negotiating leases?
1. Try to get annual rental increases that at least match inflation. Inflation is off the charts and I don’t know if it’s going to continue to go this way, but I would say try to negotiate at least 2.5-3% minimum annual increases, but the more the better. A lot of people are going to look at “What is my NOI growth over time?”. The only way to match inflation is to have increases. And if they don’t, when you market the property, people are going to do their analysis, and will be a little concerned that the growth is flat, and they may pass over your deal, or offer you a lower price to get a better return to cover for that.
2. Always do a NNN lease. Expenses are going up, we’re going through a mini insurance crisis right now in South Florida, where insurance used to cost about $1 per sf for the building. We’re looking at quotes in some cases between three and $5 a foot in certain areas.
3. Have a tenant base that is as service oriented as possible. You don’t want to have too many tenants in your tenant roster that someone’s going to inspect that rent roll and say “GameStop is not long for this world, kids are downloading video games, how is that business going to last if kids keep continuing to go online and download their video games?” You don’t want too many tenants like that, that are not long term for this retail world. You want to have a good mix of restaurants if you have the parking, because you need parking to add restaurants
4. This is important, have a thematic tenant roster. You want to try to not put the wrong type of tenants together. If you have children’s clothing, a daycare, or a church, then you don’t want to put a marijuana dispensary in the center even if you’re allowed to. They may pay good money, but they may drive off other tenants. If you have a bar, or a liquor store, then sticking a marijuana dispensary may not be a bad idea.
5. You should always be in constant contact with the rental market. An owner should want to know what all their neighbors are paying in rent, or what developments are happening locally, what new laws could affect their property, what new zoning codes are coming in, that could add density or be a detriment. Brokers can add a lot of value, it's important to pick up their calls, in order to understand where the market is, it would be a mistake not opening themselves up.
Drew Kristol
(786) 522-7065
drew.kristol@marcusmillichap.com
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