Multi-tenant commercial properties can offer Canadian investors increased security and work to keep cash flow and investment returns consistent. The strategic diversification of tenants and property types can offer even more protection, higher yields and appreciating property values.
This concept of diversification is not as advantageous in multifamily apartment buildings where similar tenants work best together. In contrast, smart leasing and tenant selection in retail can enable investors to significantly elevate returns over other sectors and competing properties.
So what are some of the tenant types that shopping plaza landlords should be incorporating and what are their advantages and disadvantages?
Brand Name Anchor Tenants
Big name anchor tenants such as Target and Wal-Mart can be very desirable. Other retailers that can be placed in this category may be notable grocery store chains and to a lesser extent popular banks and fast food chains. Name familiarity helps bring in automatic traffic to the entire plaza or shopping center.
Founder of SkyFive Properties in Miami, Kaya Wittenburg, says this goes far beyond having a solid tenant to creating value in brand equity. At the extreme this has been seen in residential developments in South Florida where Porsche and Armani are attaching their names to buildings. Well recognized names in shopping, as with hotel flags can also help when it comes to obtaining attractive financing and can add real value to the price per square foot when it comes time to sell.
However, it is important to acknowledge that licensing names and national credit tenants can come with a high cost. Sometimes this can actually become counterproductive for yield seeking investors, as big name brands have a lot of negotiating power and can be very demanding.
Small local businesses, boutique stores and startups are often seen as being riskier by experienced property investors and advisors. They typically have fewer back-up resources and may be more likely to fail or leave unexpected vacancies.
However, these tenants can also offer many advantages to commercial property landlords. Property owners have more negotiating power with these tenants, resulting in more opportunities for higher rents and performance-based bumps to rental rates. They can also bring new excitement and buzz to a shopping plaza.
Necessity stores and services are the type of tenants that often fall in the middle of the large anchor tenants. Businesses such as auto service companies, pharmacies and coffee shops can bring in steady traffic to retail centers because they offer services that are necessary to the needs of the local community.
Commercial property investors should be careful about preconceived notions when it comes to tenants and property performance. By leveraging the points above, investors can further elevate their returns and create even more equity in their holdings.