Is charging traditional per-square-foot rent over?

Allen Ginsborg
Managing director and principal, NewMark Merrill Mountain States

Brinkman July 26 Banner 300 x 250

Webster’s dictionary defines rent as “a usually fixed periodical return made by a tenant or occupant of property to the owner for the possession and use thereof especially: an agreed sum paid at fixed intervals by a tenant to the landlord.” Simple enough: Landlords have traditionally determined shopping center base rental rates per square foot based on comps, required returns on cash for tenant improvement allowances, and their negotiating skills tempered by tenant sales projections and competing vacancies in a local market. Base rent plus triple-net charges divided by sales equals gross occupancy cost, which has historically ranged between 8 and 15% for most healthy, nongrocery retailers, and this has been the metric customarily used by national merchants to determine what they can afford.

As we read daily, omnichannel retailing and technology are upending the traditional retail sales model. A recent International Council of Shopping Centers report affirms that, “The retail store remains the cornerstone of sales and marketing strategy in the omnichannel environment, but the value of a location now encompasses more than simply sales generated by a physical outlet.” These changes are beginning to trickle down to disrupt the century-old landlord rent model. So, how might rent be structured in 2030?

First and foremost, rent may be based on information gleaned from burgeoning data gathering technologies. Our company has installed Wi-Fi data collection points in many of our centers to track and collect information on hourly and daily customer counts, dwell time, foot traffic patterns, event performance and other marketing initiatives. Major retailers already track basket size, sales conversion rates and old school point-of-sale data like ZIP codes. Mall landlords and retailers are beginning to break down traditional proprietary silos to share data, which will lead to new understandings of both retailer and landlord contributions to overall customer habits, spending and preferences.

Brinkman July 8 Banner 300 x 250

Second, a physical store is still the primary channel for most retailers and isn’t losing its appeal. JLL recently reported that despite popular opinion, 82% of millennials prefer to shop in stores even after spending a lot of time studying products online before purchasing them. Studies from retailing consultant A. T. Kearny report that 23% of retail customers purchase additional items when they pick up online orders in store and 20% purchase something when making an in-store return. Even cutting-edge e-retailers like B8ta, a technology and gadget merchant, are opening physical stores to capture impressions gathered by cameras, which are analyzed by artificial intelligence to fine tune the turnover of the least impressionable 20% of store merchandise every month. B8ta’s motto is, “We think brick and mortar should be as easy, smart and open as online.” Amazon, Apple, Casper and a host of other e-tailers grasp the value of physical stores as core advertising centers for consumers to experience their products.

Third, rent may be based on more than sales occurring in a single store-based location. New technologies like geocoding allow merchants to determine the customer decision-making cycle leading to a purchase and segment it to show what factors influenced the decision to purchase. An omnichannel sales platform creates multiple customer decision-making and purchase points, so the most important factor may no longer be only where the sale occurs, but what led up to the sale. As landlords and merchants integrate image capturing and apply artificial intelligence to data, even more granular information about consumer habits will become available. Thus, rent could become a sliding percentage based on the contribution the physical store made to the sale with more rent being paid for an in-store purchase and lower rent for an online purchase that began as an in-store experience or an in-store purchase that began as internet research.

Indeed, the entire concept of rent may transform into an advertising model whereby retailers and nonretailers (who don’t have a large ad budget these days) begin to pay shopping center owners for customer acquisition and retention. The head of marketing for Eloquii, an e-commerce plus-sized fashion merchant purchased by Walmart last year, recently emphasized the importance of focusing on “the lifetime value of a customer, evaluating first-party data and value of physical stores in bringing in new customers.” Someday, in addition to food, entertainment, leisure, apparel and other merchants, we may locate Expedia, Google, Chase Credit services, Quicken loans, airline ticket sales and many other internet-based service providers in physical shopping center locations with a service agent who performs essential services over the internet. Landlords who have exciting, fun-filled projects that attract high volumes of patrons seeking experiences will be paid for their efforts based on the marketing and advertising value they bring to their merchants. This will be the ultimate merger of bricks, sticks and clicks.

Brinkman July 8 Banner 300 x 250

Featured in CREJ’s August 2019 Retail Properties Quarterly

Edited by the Colorado Real Estate Journal staff.