Although the exact tenant mix varies from one property to another, most retail centers follow a similar formula. There is a group of smaller tenants whose spaces are in the 1,000 – 5,000 SF range, and one or more larger businesses who are the anchor tenant(s).
In this article, we are going to define what an anchor tenant is, why they are important, and how they affect the sales produced by a property. By the end, readers will understand why anchor tenants are vital to the success of a commercial real estate investment.
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At First National Realty Partners, we specialize in the purchase and management of retail centers with grocery store anchor tenants. To learn more about our current commercial real estate investment opportunities, click here.
What is an Anchor Tenant?
An anchor tenant is a tenant who leases the majority of the available space in a commercial center or is the largest tenant in the center by square footage. As a general rule, anchor tenants tend to be large companies who view the location as strategically important and are willing to sign long-term leases.
Anchor Tenant Example
To illustrate the definition of an anchor tenant, consider the rent roll for one of our commercial real estate properties, Cedar Center South:
SUITE # TENANT NAME GLA (SF) % GLA 1 THIRD FEDERAL SAVINGS & LOAN 5,451 3.96% 2 GOODWILL 17,215 12.52% 5 THE JOINT 1,056 0.77% 8 O’RIELLY’S PUB 2,200 1.60% 9 IN CARE HEALTH SOLUTIONS 4,930 3.58% 10 INNOVATIVE SMILES 3,076 2.24% 11 AVAILABLE 4,421 3.21% 12 PETPEOPLE 4,300 3.13% 13 BIBIBOP ASIAN GRILL 2,663 1.94% 14 DOLLAR TREE 10,000 7.27% 19 THE UPS STORE 2,293 1.67% 20 GEOGIO’S OVEN FRESH PIZZA 1,320 0.96% 22 EB NAILS 953 0.69% 23 FIRST WATCH 3,500 2.54% 25 CVS PHARMACY 12,106 8.80% 27 PREMIER SMILES ORTHODONTICS 7,300 5.31% 28 LITTLE BELLIES SPA 865 0.63% 29 AVAILABLE 1,282 0.93% 30 AVAILABLE 1,592 1.16% 33 T-MOBILE 2,920 2.12% 35 WHOLE FOODS MARKET 45,282 32.92% 36 BOSTON MARKET 2,808 2.04% TOTAL: 137,533 100.00%
From the rent roll, it can be seen that there is a total of 137,533 SF of leasable space. Of that, Whole Foods Market leases 45,282 SF or 33% of the center, so they are clearly the anchor tenant.
Secondary anchor tenants are Goodwill, CVS, and Dollar Tree, who lease a combined 84,603 SF or 61% of the total space. All of the other tenants lease smaller units so they would not be considered anchor tenants.
Types of Anchor Tenants
There are three common types of anchor tenants, including grocery store anchor tenants, retail anchor tenants, and new types of anchor tenants. Each is described below with examples.
1. Grocery Store Anchor Tenants
Common grocery store anchor tenants include companies like Whole Foods, Kroger, Safeway, Trader Joes, Walmart, Albertsons, or Acme. These are the types of commercial properties that we specialize in at FNRP.
2. Retail Anchor Tenants
Retail anchor tenants, such as in a retail shopping mall, are big, well-known department stores like Nordstrom, Neiman Marcus, Macy’s or Bloomingdales.
3. New Types of Anchor Tenants
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In recent years, successful retail centers have been able to lease large amounts of space to key tenants in the do-it-yourself (DIY) retail sector as well as by drawing some large department stores away from traditional shopping malls.
In the last ten years, there has been opportunity for prospective tenants to lease large amounts of space away from shopping malls because the downfall of Sears left plenty of available space nationwide. Many Sears stores were in shopping malls, but many were in standalone centers that have been released to up-and-coming anchor tenants where management might be unsure about leasing space in shopping malls.
Why Are Anchor Tenants Important in Commercial Real Estate Investing?
As it relates to the success of a commercial property, both from a retail and investment standpoint, there are four reasons why anchor tenants are important in commercial real estate:
1. Stability
The anchor tenant brings stability to the property because they typically sign long term leases that account for a large percentage of the property’s rental income.
2. Traffic
Because anchor tenants are usually large, well known companies, they also tend to generate foot traffic into the shopping center, which hopefully translates into sales for the non-anchor businesses. For example, in the center described above, Whole Foods is a very popular grocery store and they attract a significant number of shoppers each day. Hopefully, the other tenants like the pizza shop or cell phone store can capture some of that traffic and convert it to sales.
3. Credibility
A well known anchor tenant can bring a significant amount of credibility to a property. This is important to secure investment capital and loan dollars. If a property is endorsed by a large, national company, investors and lenders tend to be more comfortable about partnering with it.
4. Occupancy
This one goes both ways. On one hand, an anchor tenant leases a large amount of square footage over the long term, which helps keep the property full. But, if they decide not to renew their lease or vacate their space for any other reason, anchor tenants can cause a significant drop in rental income. For example, if Whole Foods decides not to renew their lease in the property above, the vacancy rate would immediately jump by 33%.
Strong, reliable anchor tenants are critically important to the success of the investment and they are important to the success of the other businesses in the center.
How Do Anchor Tenants Affect Other Businesses?
The presence of a strong anchor tenant can affect other businesses in two ways.
1. Attracting Traffic and New Tenants
Anchor tenants attract traffic to the property, which can benefit other tenants. In addition, a good anchor tenant can attract new tenants to vacant spaces. For example, if there is a smoothie store looking to expand, it can make a lot of sense to lease retail space in close proximity to a Whole Foods store.
2. Co-Tenancy Clauses
It is common for retail tenant lease agreements to include something called a “co-tenancy clause” because property owners recognize that the existence of an anchor tenant is a major factor in a smaller tenant’s decision to sign a lease. If an anchor tenant decides to vacate their space, the co-tenancy clause states that the landlord has a certain amount of time to re-lease the space before they have to begin offering some sort of rental relief to the non-anchor tenants. In other words, the loss of an anchor tenant can have a negative impact on the businesses who rely on them to generate traffic.
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For both of these reasons, it is important for real estate investors to understand the role that an anchor tenant plays in a retail property, how much time is remaining on their lease, how much rent they pay, and how healthy their overall business is. As their name suggests, the success of a commercial retail investment is literally “anchored” to the existence of certain tenants.
The Current State of Investing in Shopping Centers with Anchor Tenants
Over the last several years, investors have noticed that certain retail centers are taking foot traffic away from shopping malls and other properties that struggle with changing shopping patterns. Grocery retailers and value-based retailers, such as dollar stores, discount retailers, and retailers specializing in “treasure hunt” tactics, are generating strong foot traffic as consumer shopping habits change. Also, do-it-yourself retailers and auto parts retailers have become very popular among consumers.
Investors have become very interested in shopping centers with these types of anchor tenants because they are often national retail chains that sell products and services viewed by consumers as necessities. By nature of the products sold at these locations, the anchors are important players in their markets. The customer foot traffic anchor tenants generate can draw tenants and keep the retail center stable. Taken together this can make for a profitable, stable, and safe investment over time.
Anchor Tenant Trends in Commercial Real Estate
One of the things that makes the real estate business exciting is that it is dynamic. On this point, there are three important anchor tenant trends that potential investors should be aware of.
1. Multi-Channel Fulfillment
The rising importance of multi-channel fulfillment is a trend. As more and more retail sales take place online, the way that anchor tenants use their floor space is changing. Specifically, it is shifting towards a smaller amount of square feet devoted to the sales floor and more space dedicated to storage and online order fulfillment. This way, full service retailers can meet the needs of in person customers, buy online/pickup in store customers, and customers whose order must be shipped. This is especially true in big box retail stores and those tenants who lease a large amount of commercial space.
2. Open Spaces
Creative developers are replacing some retail development anchor space with public, open space that could include fountains, gardens, and other attractions that are free to the public. While this may seem counterintuitive, the idea behind this is to encourage shoppers to stick around and hang out. The longer they are on the premises, the more likely they are to buy something.
3. Experiential Components
Retailers are updating their stores to include more of an experiential component to get people off of their computers and into the stores. For example, a sportswear company like Nike has been known to put a basketball court inside of their stores to encourage people to try their merchandise. As a private equity firm, we like companies with an experiential component, like boutique gyms, nail salons, and quick service restaurants, because they are less exposed to e-commerce disruption.
Private Equity Commercial Real Estate Investing & Anchor Tenants
Leasing space to anchor tenants can be very advantageous to commercial real estate owners. But, one thing to realize is that anchor tenants are usually only interested in leasing space in the best locations and at the highest quality shopping centers. Purchasing shopping center assets is very capital intensive, and once purchased, shopping centers can be difficult to manage effectively.
Many individual investors or small partnerships do not have the capital necessary to purchase a high-quality shopping center. They also might lack the time and capabilities to manage it well. Hiring a property management firm is an option, but it comes with certain disadvantages, such as cost. Property management expenses can eat up a significant amount of cash flow every month for individual investors. For this reason, we manage our properties in-house.
Many real estate investors interested in the shopping center asset class choose to invest through a private equity commercial real estate firm, like us. Private equity firms that specialize in this asset class know how to raise the capital necessary to purchase these assets, and they know how to source deals. They also have the knowledge and ability to manage the properties post-acquisition.
Summary & Conclusion
- In a commercial retail center, an anchor tenant is one who leases the largest amount of space.
- As a commercial real estate company, we like grocery store anchored retail centers. Example anchors include companies like WalMart, Kroger, Safeway, and Whole Foods.
- Anchor tenants are important to the success of a center because they help to stabilize cash flow, attract other tenants, and bring credibility to the space.
- In addition, the existence of an anchor tenant can affect other businesses because they help to attract traffic that can be converted into sales.
- As the retail market continues to change, anchor tenant business strategies also evolve. In the future, anchor tenants will likely devote more space to shipping and in store pickups and may update their store to include more experiential components.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or [email protected] for more information.
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