You’ve lined up sufficient capital, done some research and begun looking at vacant storefronts, but aren’t sure how to decide where to land. So how do you select the right location to lease for your retail store or consumer service business?
If you already know the character of a town, its people, their travel patterns and shopping habits, you’ll be much better off. Having a network of pre-existing relationships and local contacts will help you start on the right foot, hopefully with lots of referrals from friends and positive local and social media feedback.
Run demographic analyses for locations with similar successful businesses that you are familiar with and compare them to locations you are considering. A broker who specializes in representing retailers can do this for you (see #4). Consider the shape and reach of your trade area – how far will customers travel to visit your store? Is the local population growing or changing significantly? How is it changing? Do the changes create more opportunity or greater risk? Look at the daytime population. How much will your business benefit from daytime customers vs. resident population? Does the income profile of the market align with the expected pricing of your product or service offerings?
For each location or market you are considering, map out your competitors and honestly evaluate how much of their business you will be able to steal and/or how much potential there may be to expand the pie to meet unsatisfied local demand or looming market growth. Don’t forget to consider the potential for future competition. Where might a new competitor locate that would hurt your business significantly?
A good broker, who specializes in retail real estate, particularly representing national retailers, will have insight regarding the selection criteria used by successful national retailers. You should take advantage of the experience they have evaluating the factors that matter most to the pros. It’s also likely that they have already compared and contrasted the shopping centers in your target market for other retailers. They will also have relationships with the owners of the best shopping centers. These relationships can be vital given that there is always strong competition for the best spaces.
You are now ready to start assessing individual spaces that meet your size criteria within your chosen market. First, consider how the space will ideally lay out. How much storage area will you need? If the space is narrow and deep, can you create an effective layout? How much window-line do you need? Will you need special loading/delivery capability, etc.
Each space and each property will have its pros and cons. Some may be more, or less important to your business than other expanding retailers with whom you may be competing. Consider the importance of such factors to your potential business:
Retail real estate is not a commodity. The best locations command the highest rents because retailers can generate higher sales from such locations. Consider all the factors above and try to estimate the sales and gross profit you expect to generate from the spaces that you haven’t yet ruled out. Once you have done this, and determine the net profit you will need to make your business work, you will be able to determine how much rent you can afford for each location. At this point you should have a general sense of the asking rental rate and expenses for each targeted property and will be able to refine your list of potential locations.
Seek proposals from the owners or brokers representing the properties that you are interested in pursuing. A written request for proposal, or RFP, which spells out the terms you would like the owner to address in their proposal (often referred to as a letter of intent, or LOI) can be helpful to allow apples to apples comparisons. It may also signal to an owner that you’ve got your act together and are considering other locations at the same time. A broker can help with this as well (see #4)
Once you’ve narrowed your list to two or three finalists, go back and check all your assumptions and get ready to make a decision. You should also consider who your landlord will be and what kind of management you can expect. Is your landlord a full time real estate operator? Do they specialize in retail real estate? Do they have the capital to maintain the property in a first class manner and do they have a track record for making improvements to their properties? Does the landlord use or provide professional property management, or is it handled by the owner or a family member on the side?
Get ready for an adrenaline-ridden, sleep deprived, and rewarding ride. Work hard to refine your business over time and maximize your profits. Then you’ll be ready to select another market for your next location and repeat steps 1 through 10.