Shopping Center Tenant Selection and Mix

Abstract

In a market economy, retail tenants cluster by type and by location. The result is a hierarchy of centers offering a mix of goods and services appropriate to the market area. This occurs because different goods and services have different trade areas and minimum purchasing power requirements. Central place theory helps describe, explain, and predict changes in the area or purchasing power of a region. A good market analysis will use those factors identified in the theory to select potential tenants.

Rather than wait for the market to select survivors through attrition, owners and managers of retail property have developed guidelines and techniques to improve the efficiency and effectiveness of retail centers. An important factor in improving centers is the selection and control of tenants for an optimum tenant mix. Selection of the key or anchor tenant is the first critical factor. After the selection of the anchor, decisions can be made about (1) identifying the appropriate variety of tenants to create an image that differentiates the center, (2) selecting tenants that help each other increase sales by creating center synergy, (3) selecting tenants for financial stability to satisfy underwriting requirements, (4) setting total charges — rent, common area maintenance, taxes, insurance, and particularly percentage rent — to fairly compensate for the risk involved in creating a successful center with high sales volume, and (5) establishing tenant control through leases to offer the landlord some degree of management of risk.

One concern about the current practice is that tenant selection risk management is done through the lease, on an individual tenant basis. Decision makers look at expected rents but do not explicitly consider the advantages of diversification of the tenants.