Commercial Real Estate & Advisory
Commercial Real Estate & Advisory
The City’s retail landscape is now clearly a tenants market.
Landlords are generally reconciled to the idea that they must accommodate prospective users of their increasingly vacant spaces. However, most landlords have only a rudimentary idea of what these needs are, for instance, whether a particular location is suitable for the retailer’s product.
Requisite sales figures and attendant costs are generally a mystery to both brokers and landlords. Knowing these details creates a shared understanding between parties that facilitates negotiations. Armed with correct information, brokers can help landlords understand the economic specifics underlying the decision to rent a store. On the tenant side, brokers can truly be empathetic to the requirements of those they represent.
To do this, we must learn the new math. We all can figure out what 3.3% of the aggregate total of a lease is. It is imperative to discover some other calculations. If brokers know what the costs are to run a store, they can be effective allies of both tenants and landlords. We can become informed partners for either side.
Further, we should understand the numbers behind sales projections. With this knowledge we can guide tenants to make educated choices, and we can help a landlord understand the facts of retail in New York City.
If both sides realize just how much business has to be done to support a certain rent, there is the possibility that they might manage their expectations in a different manner.
The old saw that rent should not exceed 10% of a store’s business no longer cuts. Over the years, New York retail rents have soared, making 15% a more accurate estimate. However it does not suffice to say that a unit that rents for $300,000 a year must produce annual sales of $2 million. How is the number achieved? Let’s analyze that $2 million target more precisely.
It equates to $38,461 per week in sales, or about $5,500 per day. Consider that the average retail cost per item is $150. That would be 36 transactions per day, or 256 per week. Now think what that translates to if the average item is $75. And if the average cost per item is $25, it is 1,538 transactions per week, or 219 per day.
Now imagine standing in a store and waiting for all those customers. It hardly happens easily and sometimes hardly at all. In the current economic climate there are not that many customers entering a store, much less purchasing an item.
Another important yardstick of retail viability is receipts per square foot. If the store under consideration is 1,500 s/f, it would need to produce $1,300 per square foot per year—far higher than industry average.
Whether or not sales projections are met, there are still plenty of bills to pay. What are the costs beyond rent involved in running a retail operation? We all know there are utilities, salaries, advertising and a host of other costs involved. But what are they exactly, and how much do they each cost? This data supplies the necessary perspective to evaluate any retail situation.
The most basic cost for retailers is that of the merchandise being sold. The difference between what an item is purchased for and what it is sold for is gross profit. That difference is called the markup. And if the markup is not sufficient, the gross profit is not large enough to cover all the other costs.
And when that happens, it is called losing money, which is what most retail stores have been doing lately.