Understanding the Importance of a Shopping Center’s Tenant Mix

Tenant Mix Overview

  • According to International Council of Shopping Centers (ICSC), a shopping center is defined as a collection of retail establishments managed as a unified property. Shopping centers vary in size, ranging from small strip centers catering to local convenience needs to large megamalls boasting expansive retail spaces.
  • Shopping centers can be categorized as; isolated stores, unplanned business districts, and planned shopping centers. This article will focus solely on planned shopping centers and their “ideal” tenant mix.
  • A planned shopping center comprises of architecturally unified commercial establishments centrally owned or managed, designed and operated as a cohesive unit, and accompanied by parking facilities. Its location, size, and tenant mix are tailored to the area it serves, typically featuring anchor stores or major tenants, such as supermarkets or department stores.
  • More recently, these centers have evolved from spaces for buying goods or services to being centers that provide entertainment and experiences. Furthermore, it is emphasized that shopping centers should provide convenience by consolidating a diverse range of businesses within the same location, simply put as having everything under one roof.
  • A property’s tenant mix can be defined as the group of tenants that occupy it or the composition and diversity of its tenants, based on their industry, size, reputation, and compatibility.  The tenant mix aims to create an assembly that optimizes sales, rents, community service, and the financial viability of the venture.
  • In essence, a good tenant mix involves a variety of stores that complement each other, enhancing both the overall center’s performance and the success of individual businesses. Crucially, the financial success of a shopping center depends directly on its retail tenants, as they generate income for the center.
  • In retail properties, there is a significant amount of time and thought that goes into choosing the ideal tenant mix and the responsibility of selecting tenants typically falls on the property owner or the property management team.
  • An effective blend of tenants has the potential to elevate the value of your property by drawing in a larger customer base, increasing foot traffic, fostering synergies, and minimizing risks associated with vacancy and turnover.
  •  Conversely, an unfavorable mix of tenants can diminish your property’s value by instigating conflicts, diminishing sales, raising operational expenses, and dampening demand. To attain a favorable tenant mix, it is crucial to consider factors like the quality of tenants, the ratio of tenant types, the clustering of tenants, and the alignment of tenant businesses.
  • The concept of the tenant mix in shopping centers can be approached in twofold. The first part addresses the position of shopping center in relation to competitors, and this addresses the question of how to get as many customers as possible to a shopping centre to spend their money there.  
  • The second part focuses on enticing customers to explore all areas of the shopping center and focuses how to tempt customers to walk through all parts of the shopping centre, since it increases the likelihood of their spending.
  • Both tenants and landlords prioritize traffic. However, attracting customers and motivating them to linger in the mall requires the manager to assemble an ideal mix of tenants that meets the needs of the majority of visitors and keeps them engaged for extended periods.
  • Knowing how to draw customers to a shopping center and keep them there longer provides developers, managers, and architects with the tools to optimize the selection and arrangement of tenants, designated by the tenant mix.
  • To achieve an optimal tenant mix, factors such as tenant quality, the proportion of different tenants (tenant mix ratio), how they are grouped together (clustering), and how well they match the overall theme and goals of the mall (alignment) are crucial.
  • In addition to the types and quantity of stores, the combination of retail and non-retail establishments (like food, beverages, and entertainment facilities) is crucial for satisfying customers seeking diverse shopping experiences, adding excitement to their shopping journey.
  • Several studies emphasize the importance of the composition and number of stores, including the mix between retail and non-retail establishments. The optimal tenant mix is characterized by a diversification of shops, synergy among tenants, logical layout, a pleasant shopping environment, and maximum return on investment.
  • The studies by several scholars emphasize the importance of a variety of complementary retail and service providers. The researchers underscore the influence of factors like the number of shops and the presence of well-known brands on shopping center choice. The impact of the tenant mixes on customer satisfaction and the selection of preferred shopping locations is a recurring theme. Studies suggest that retail tenant mix, influenced by product range and merchandise, plays a crucial role in visitor satisfaction.
  • There is no specific formula or guideline for an ideal/optimal tenant mix. The absence of a universal formula or guideline allows shopping centers to differentiate themselves, maintaining a competitive edge.
  • The Institute of Real Estate Management emphasizes on customization, based on specific variables like location, size, and demographic profile. As the retail real estate sector evolves, new formats emerge, intensifying competition. It is hence crucial to consider the following factors while developing the tenant mix in a shopping center:
    • Anchor Tenants: The anchor tenant is responsible for drawing traffic to the mall. Typically, the anchor tenant is a large supermarket or a departmental store. The management should hence onboard popular and well-established anchor tenants that draw in significant foot traffic. These anchor tenants contribute to the mall’s overall visibility and attractiveness.
    • Target Market: The tenant mix should align with the interests and expectations of the target market, local community and potential visitors. The management should identify and understand and cater to the demographics, preferences, and needs of the target market when formulating the tenant mix to encourage high footfall and customer experience. 
    • Complementary Businesses: Consider how tenants’ businesses complement each other. For instance, pairing a grocery store/healthy food store with a gym can attract health-conscious customers looking for healthy food options after a workout or pairing a coffee shop with a bookstore. This will encourage cross-shopping and increasing the overall appeal of the mall.
    • Accessibility and Visibility: Consider the layout and design of the mall when allocating spaces to tenants to ensure easy accessibility for customers and optimal visibility for tenants. Strategically place key tenants in high-traffic areas to enhance the overall shopping experience.
    • Tenant Stability and reputation: Evaluate the stability and financial strength of potential tenants. Choose those with a proven track record of success to ensure long-term sustainability. This ensures the turnover of tenants is low and also minimises risk of arrears. Further, reputable tenants will contribute to improving the overall perception and image of the mall.
    • Retail Categories: Diversify the tenant mix by including a range of retail categories such as fashion, electronics, beauty, food and beverage, entertainment and lifestyle. This variety caters to different customer preferences and needs, attracting a broader audience.
    • Entertainment and ExperiencesMalls have grown from retail centre to entertainment hubs. The management should hence integrate entertainment options and experiential offerings, such as cinemas, arcades, or interactive displays. Creating an enjoyable and memorable experience encourages customers to spend more time in the mall and this increases the likelihood of them spending more money.
    • Lease terms and administration:  This refers to the contractual obligations and rights of both the landlord and the tenant, such as rent amount, escalation, lease duration, lease renewal, lease termination, lease assignment, and lease incentives, and their implementation. Favorable lease terms can increase the property value by providing stable and predictable income and enhancing tenant retention. Additionally, the management should consider the seasonal businesses while working on the lease terms. Mixing both seasonal tenants and the traditional long-term tenants ensures maximum revenue for the mall and increases the traffic within the mall. The seasonal tenants can be accommodated on the vacant units or even through activation of common areas. 
    • Community engagement:  The tenant mix should be designed in a way that caters to the needs of the community around the mall. Turning the local community into regular shoppers within the mall creates good rapport and fosters and sense of ownership from the community.  This will in return increase footfall and support for the mall. Additionally, the mix should include local and niche brands to add uniqueness and cater to consumer preferences. This can set the mall apart from competitors and appeal to a diverse range of customers.
    • Flexibility and AdaptabilityThe tenant mix is developed through understanding the needs and preferences of the target market. These needs are not static, and change from time to time. The management should always keep abreast with the trends, and adjusting accordingly to ensure the mall has a competitive edge. The management should hence work on a flexible tenant mix that can adapt to changing market trends and consumer preferences. A tenant mix should also evolve over time to ensure the mall remains relevant and competitive.
  • By carefully considering the aforementioned factors, mall managers and landlords can create an ideal tenant mix that not only meets the needs of the target market but also enhances the overall success and sustainability of the mall.
  • The composition of tenants in a property is crucial as it strongly influences the success of its businesses. A well-thought-out tenant mix not only contributes to tenant retention but also enhances the property’s overall attractiveness to potential future tenants. The following are the benefits of achieving the optimal tenant mix:
    • Optimal revenue Generation: Diversity in the tenant mix attracts a broader customer base, leading to increased foot traffic and higher sales which optimizes revenue.
    • Increased occupancy Rates: A well-curated tenant mix contributes to high occupancy rates by selecting tenants that complement each other and appeal to the target market which ensures a steady flow of tenants by retaining old tenants and attracting new ones hence minimizing vacancy rates.
    • High footfall: An ideal tenant mix with popular brands, niche businesses, and complementary services create a vibrant and appealing environment, attracting more customers/shoppers. Increased foot traffic benefits not only the individual tenants but also contributes to the overall success of the mall.
    • Tenant Satisfaction and Success: A good tenant mix not only benefits the mall but also supports the success of individual tenants. When businesses complement each other, there is a potential for cross-promotion and mutual support, creating a positive environment for tenant success.
    • Competitive edge: A strategically planned tenant mix gives the mall a competitive edge over others. By offering a unique combination of stores and services, a mall can distinguish itself from competitors and become a preferred destination for not only for consumers but also potential tenants.
    • Adaptation to Market Trends: A flexible and well-thought-out tenant mix allows the mall to adapt to changing market trends. By staying attuned to consumer preferences and adjusting the mix accordingly, the mall remains relevant and appealing in a dynamic retail landscape.
    • Improved customer experience & community integration: A diverse range of offerings, from retail to dining and entertainment, provides visitors with a comprehensive and enjoyable experience, encouraging them to spend more time in the mall. Further, with a diverse tenant mix, a mall is able to align with the needs and preferences of the local population, thus becoming an integral part of the community, fostering loyalty and repeat visits.
  • Tenant mix is recognized as a critical factor for all stakeholders in shopping center development and management thus the mall managers and developers formulate and implement bespoke guidelines to create the most attractive tenant mix for their shopping center.  
  • Typically, the mall tenants can be categorized into three main groups: Anchor tenants, specialty tenants and service tenants. In the pursuit of the ideal tenant mix, the consideration of these tenant categories plays a crucial role.
  • The anchor tenants are large and well-established retailers and serve as the main attractions, drawing significant footfall and defining the overall identity of the commercial space. They often sign longer leases and take up most of the lettable area in a mall. Their presence creates a strong initial impression, encouraging other tenants to join the vibrant community. Due to their impact and significance, the anchor tenants should be clearly matched to the local customer profile so they draw significant footfall on daily basis. Other tenants will want to be close to the anchor tenant to benefit from their heavy pedestrian traffic.
  • Specialty tenants, on the other hand, bring diversity to the tenant mix. They are smaller, niche businesses that offer unique products or services that cater to specific consumer preferences, enriching the shopping experience and attracting a specific demographic. Their contribution enhances the overall vibrancy and appeal of the commercial property, encouraging a wider range of visitors. They offer something different from mainstream retailers as they attract a specific demographic or interest group. Specialty tenants contribute to making the commercial space more dynamic, engaging, and memorable for consumers. They include tenants like: artisan stores dealing in handmade jewelry, art, textiles or pottery, Tech and accessories shops, vintage and retro shops, pet stores, ice cream shops, gaming alley and arcade, book stores with a niche focus such as comic stores, rare and collectable books etc.
  • Service tenants complete the well-rounded tenant mix by providing non-retail services, such as salons, fitness centers, banking services or healthcare facilities. Their presence contributes to the convenience and well-being of visitors, transforming the commercial space into a destination for both shopping and services. This comprehensive mix encourages visitors to spend more time, promoting a holistic shopping and lifestyle experience.
  • Achieving an ideal tenant mix is a multifaceted challenge, requiring a delicate balance of different tenant types to create a dynamic, appealing, and customer-centric shopping center. As the retail landscape continues to evolve, the pursuit of the perfect tenant mix remains a strategic imperative for management.

Our view

  • The tenant mix in commercial real estate plays a crucial role in generating revenue, maintaining high occupancy rates, and enhancing the overall attractiveness of the property. However, landlords and mall managers frequently grapple with a challenging dilemma- finding the balance between curating an optimal tenant mix and maximizing the occupancy of available spaces.
  • This nuanced decision-making process requires careful consideration of various factors such as target market, complementary businesses, tenant stability, and lease terms to ensure both tenant diversity and the efficient optimization of lettable areas.
  • Creating the ideal tenant mix is often likened to solving a complex puzzle, given the intricate and artistic nature of this process. The potential combinations of retail and service categories seem almost boundless, presenting a challenge in identifying the perfect balance for a specific shopping center.
  • Designing and implementing the ideal tenant mix involves more than just a mathematical allocation of space among different tenant categories. It requires the creation of a mix where each tenant contributes a unique product or service. To achieve this, understanding the demographics, psychographics, socio-cultural characteristics, attitudes, and primary consumer focus of the potential shopper population in the primary and secondary zones of the shopping center’s trade area is essential. This is achieved by conducting a feasibility study on the onset of the project.
  • Moreover, the evolving market, changing customer preferences, and shifting consumer trends add layers of complexity to achieving an optimal tenancy mix. In the highly competitive retail industry, where competitors’ actions significantly impact marketing strategies, center managers and operators are continually adjusting and fine-tuning their tenant mix to stay aligned with market trends and maintain a competitive edge.
  • A good tenant mix encompasses a diverse array of compatible retail and service providers. Efficient space allocation, both in terms of size and number, and strategic tenant placement are essential factors fostering customer interchange and vibrant retail activities within the center.
  • By carefully curating the tenant mix, property owners can optimize their investment and create a thriving commercial property. Taking a broader perspective, an ideal tenant mix also extends to the provision of ample public facilities and services, ensuring quality and quantity meet the demands of shoppers.
  • It incorporates elements such as goods and services, convenience, excitement, and amenities to create an environment that satisfies shoppers’ needs. These essentials collectively contribute to enhancing the overall quality of the shopping center, making it a dynamic and appealing destination. As shopping preferences evolve and market dynamics continue to shift, unravelling the puzzle of achieving an ideal tenant mix remains a continuous challenge for center managers and operators.

Source: First National Realty Partners, Commercial Real Estate Online Resources Worldwide, International Council of Shopping Centers and Sterling Real Estate Advisory

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