Maximizing Renewals
I’ve had an unusual amount of questions regarding renewals lately so here goes:
My top tips on maximizing renewals…
Market Knowledge:
As in new leases or renewals, your market knowledge is KEY!! Knowing if: 1. your pizza guy could relo to a nearby center for cheaper rent, or 2. if a neighboring landlord would be willing to turnkey their pizza place or 3. the neighboring center would be better ingress and egress for 4. the delivery guy or 5. if the location has much better visibility for the brand- is CRUCIALLY important when evaluating the renewal.
Cost to relocate:
If the tenant (think restaurant, salon or medical) 1. has significant infrastructure and it would be very expensive for them to relocate, it’s very important to analyze vs 2. if it’s a cell phone store and they could easily and cheaply relocation.Do you even want this tenant to renew this particular tenant or particular use? Are the tenants’ sales matching your centers’ mix or is it a mismatch? If the tenant is out of options, you don’t HAVE to automatically renew them. Yes, it is more work to find a backfill but our job is to maximize the value of the center and if the use no longer mixes well with the new ten mix or their sales are not, it may be time to invite them to find another location.
Rates:
Sales knowledge and occupancy cost ratio is imperative when determining the new rents. If the tenant is paying $25psf, and the new lease market is $28, but the tenant’s occupancy ratio is 4% and it’s a pizza guy, then you could present very comfortably and confidently an 8% occupancy ratio. Yes, that would double his rent and be much higher than the market rents in your center but He CAN afford it. Now would I do it? If you know me, you know I would, especially if I evaluated the rest of the market and knew they couldn’t relo anywhere else, or if they did it would cost a few hundred thousand to do so. Now maybe practically I’d only raise them to $40nnn but my major point is I WOULD NOT SEND A RENEWAL AT A 3% INCREASE! Would the tenant leave your center when he has an over-performing store for an increase of $1500 per month – I think not (even if it’s a 37% increase in rent!)
I would NOT do this with uses that have zero infrastructure and could relo very inexpensively. The infrastructure in the space makes it a very important factor with this process.
Multiple leases expiring at the same time
(developers read: please stagger lease terms on ground-up developments when possible)
One time I literally had 14 leases expiring the same year in a Publix anchored center. Luckily we had done a great job collecting sales so I knew who was doing well and who was not. We started 12 months in advance and worked on the tenants who had significant infrastructure in their spaces. (All of the renewals were set to renew at market rents.) We renewed all of the medical users such as dentist, urgent care and optometrist first. Then we renewed the Italian restaurant, sub shop, and Chinese restaurants next. By the time it had come to 90 days before expiration, we had renewed 80% of the expiring tenants and had set precedent on the “market” rents. Two of the tenants who did not have significant infrastructure did relo for cheaper rents. But luckily we backfilled them quickly.
Knowledge of market and sales is crucial when faced with multiple expirations at the same time.
My last tip is:
Making sure you know what uses are doing well in your market and those that are not. Having coffee with your neighborhood leasing agents on a regular basis will help with this updated market knowledge. This will help when evaluating which concepts to keep and which to let go.