5 Helpful Steps to Find a Retail Space for Lease
NYC is a retail mecca filled with boutiques, art galleries, showrooms, cosmetic stores, technology retailers and more. To find the retail store for rent that fits your style and budget, read on.
There are many factors that go into deciding where to operate your retail business. Will you open a convenience store, a specialty store or a café? Is the space you find in the right zoning with no restrictions for your operation? Just as you’ve spent time fine-tuning your product line or service, it’s time to select your retail space with the same care.
Owning your own business and retail store can be very fulfilling but be intelligent in your choices to protect your investment. Size, location and budget are the key elements but by no means are they the only pieces of the puzzle.
Figure Out Your Store Size
How much space do you need? If this is a new business venture, you’ll have researched your competitors, visited their stores, and forecast sales.
Within your industry there are generally standards to use as a benchmark. Use association data, market analyst reports, and online statistics, keeping in mind your local market. Your banker or commercial broker can also help.
As you step inside each location for research, observe the customer flow. Where is the cash wrap on the sales floor and how many dressing rooms are there? A stock room is most often a necessity, but too large of a space may be overkill for a premium rent space. Maximizing sales per square foot is the goal.
Is there special equipment needed in your floor plan? How about an office? Areas common to retail include the sales floor, storage, dressing room, and bathroom. The layout is where you get to be creative while working within your store size. You don’t want to stuff your customers into a small space, but instead allow them to browse comfortably.
About Sales Per Square Foot
This is a metric commonly used to gauge the health of your store. Take this example:
You believe that your electronics store will generate $500,000 in sales, and market data tells you that the average sales per square foot is $500 for that type of store. The space you are looking at is 1,200 square feet. Plug the numbers into the formula like this:
$500,000 in sales / 1,200 square feet = $417 sales per square foot
In this example it seems you’re in the ballpark, right? Examine this number further if you have significant online sales, as this may not be an accurate figure to focus on.
If you’re relocating your retail store, you’ll have sales history to figure out if the space you’ve been renting is being used efficiently by using this formula. Now you can adjust accordingly in your move.
When thinking about your store size, plan for any future expansion. Yes, you want to cover your current needs, but you also want the ability to grow as your business does with extra space.
Define Your Budget
How much should your retail shop pay in rent? This is another area where you can start with researching industry averages. The range for rent as a percentage of sales is wide, from 1 to 13 percent and higher, and most retailers will fall within 5 to 10 percent. Other occupancy expenses would be added such as insurance, utilities and taxes.
Will you look for a retail store for lease that’s a blank canvas giving you full control over everything? In that case you’d be gathering architect, engineer, contractor and interior design estimates. For a new business, pre-opening expenses will also include furniture, merchandising displays and initial inventory.
It comes down to what you can comfortably afford. It doesn’t make sense to rent more space than you need and overpay. In your search for a retail store for rent, you’ll find a number of possibilities. Take the time necessary to make the right choice.
Ideally, you’ve planned perfectly, and your numbers all pencil out, but we know that’s not how it works the majority of the time. Try to overestimate in your budget so you’re not caught off guard. Second to inventory, rent will be the highest expense. You’ll also be committing to a 3 to 5-year lease or longer, be sure to forecast the entire lease term.
Find the Best Locations
If given the opportunity, choose location over size. This is especially true if your business is not a destination shop like a bridal store or dentist. Examine who your customers are and where they will come from. Retail space for lease is a decision not to be taken lightly.
Retailers have also proven success locating near their competitors and complementary businesses. Be where your target demographic is. Easy math will tell you that higher volume equals higher sales. If a happy shopper is looking for high end luxury clothes, of course said happy shopper would like some other store options to choose from.
Rent is driven by location and can range from $70 per square foot up to $2000 per square foot and more. Madison Avenue’s average asking rent is $1039 per square foot. East 86th Street averages $365. On 14th Street per square foot rent averages $277.
By defining who your ideal customer is, and knowing your product or service inside and out, you’ll be able to narrow down your locations. Chelsea? Times Square? The retail landscape in NYC is shifting, and new development projects are prompting more competition.
A brick-and-mortar retail store also needs to be safe for you and your customers. Is it a solid building that is up to code, complete with alarm and sprinklers?
Choose a Commercial Real Estate Agent
Hire an agent that specializes in shops for lease. He, or she, will have invaluable knowledge of trends in the market and know about new opportunities in up and coming neighborhoods.
With years of experience, commercial real estate brokerages like Sky New York Realty have developed relationships with landlords and offer free location service to tenants. Use their expertise and let them do the legwork. No pressure here, but picking your business location determines its success.
To find an agent, ask for referrals from other retailers similar to your operation. Have a longer conversation to ask how the process went and if the agent performed well. Word of mouth is one of the best, most true methods of referral out there.
Alternatively, do your own search for NYC commercial real estate brokers. Review their websites, determine how long they’ve been in business, and how well-connected they are.
When you’re ready to interview your top few choices, ask what their specific experience is with your type of store. How knowledgeable are they about the 150-plus neighborhoods in the greater NYC area?
Review Your Lease Options
Carefully review your lease from beginning to end with your broker and/or attorney. The strong negotiating skills of your broker will come into play as you go back and forth with the landlord. A lease for a retail rental space can be a complex document of up to 50 pages or more, so quite daunting.
You’ll want to learn the typical terms of an agreement and the types of leases out there, such as a net lease and gross lease. Plan for unlikely scenarios as well. Once you find retail space, can you assign the lease, or sublease to another tenant?
Assigning gives you the ability to transfer all obligations of the lease to a new tenant. This new entity pays rent directly to the landlord.
When you sublease a store, you are renting to another tenant while remaining the original signer of the lease. You collect the rent and pay it to the landlord.
You aren’t completely off the hook in either of these cases. You may still have obligations especially if the new tenant falls behind on rent. Some other options to look for, and understand completely, include:
Renewal. A commercial landlord is not obligated to automatically renew your lease. Build in the option at the start so you’re not scrambling. In your communications with the landlord you will have made sure he has confidence in your business by stating your experience and plan for success.
Renewal rents are raised by either a fixed percentage or using fair market value. Typically, a percentage rate increase is 2 to 3 percent each year. Once a renewal option is exercised and a fair market valuation is needed, the tenant and landlord try to agree on what that rent should be. If that doesn’t happen, each is able to hire an appraiser. If the appraisers can’t agree, a mutually chosen third appraiser is brought in.
Term. Watch for the terminology commencement date and effective date. The effective date is when the lease is signed. It’s possible for the commencement date to be weeks or months later if the space is to be renovated. If you’ve negotiated free rent in lieu of improvements, then both dates can be the same.
Build Out. The longer the lease, the more likely you’ll have a contribution by the landlord. He wouldn’t be inclined to make an investment for a short, 2-year lease.
Fixed Rent and Additional Rent. The base rent is your fixed rent that you pay each month. Additional rent can be in the form of real estate taxes, or expenses incurred by the landlord for the maintenance and repair of the building. It could also mean percentage rent, an amount over and above the base rent. In this case the base rent is typically lower. If you’ve negotiated for percentage rent, have the exclusion of returned product built in to tracking revenue, and any additional exceptions you think necessary.
Right of First Refusal. This option means that if a landlord has additional space come up for rent, he is required to offer it to you first. He must also offer it at the same terms as he would to any other tenant.
Operating Hours. Your landlord may require that your store be open certain hours of the day. Or, the opposite. For instance, if your store is located below residences, the landlord could limit how late you can stay open. He wouldn’t want any business to disturb the other tenants. There might even be restrictions on noise and long lines. Bona fide complaints could jeopardize your lease.
You don’t have to find a retail space on your own. And you shouldn’t. Work with a team of professionals, brokers, bankers and analysts and have the weight of their experience behind you. From appliance stores to sporting goods and liquor stores, there are online and in-person resources to tap into. If this is your first retail rodeo it definitely will pay to do your due diligence.