There’s much more to the actual cost of leasing a retail space beyond asking rent. In this article, we’ll discuss how retail leases work, the best way for a new retail business to budget for monthly rent, and extra costs to consider to help understand what renting a retail space really costs.
Main Types of Retail Leases
Looking for a commercial space to rent can be confusing at first. No two leases are the same, even with the same retail landlord, leasing office, and property.
It helps to understand the main types of retail leases when looking at retail commercial spaces for rent.
Retail lease types
- Gross lease is an “all-inclusive” retail lease that includes a single payment for everything, including utilities and triple net expenses.
- Modified gross lease consists of the base rent and some tenant expenses such as utilities or janitorial service.
- Single net lease for retail space means the tenant pays a base rent, utilities, and property tax (which is the ‘single net’).
- Double net lease is when the retail tenant pays a base rent, utilities, property tax, and pro-rata share of insurance on the property.
- Triple net lease is typical for anchor tenants or single-tenant retail properties and means the tenant pays base rent, utilities, property taxes, insurance, and building repairs.
Percentage Retail Leases
Retail tenants with a percentage lease pay a lower fixed base rent each month, their share of the net charges, and a percentage of monthly gross sales as additional rent.
Although paying a percentage of revenues to a landlord may seem unfair at first, percentage retail leases can be a win-win for both the landlord and tenant. Landlords are incentivized to keep space for rent as a commercial retail property in top condition to attract foot traffic, while tenants pay less rent when business is slow or seasonal.
How a percentage retail lease works
Let’s assume a retail tenant has a base monthly rent (including net charges) of $7,500 per month and pays 3% of gross monthly sales of $50,000 or more. If the tenant’s gross sales this month was $125,000, the total rent based on a percentage lease would be $9,750:
- Base rent = $7,500
- Percentage rent = $125,000 – $50,000 = $75,000 x 3% = $2,250
- Total rent = $7,500 base + $2,250 percentage = $9,750
How to Budget for Retail Rent
When retail tenants start a business, it’s challenging to know how much rent to plan on paying each month. To help budget for retail rent, property management company Hartman recently surveyed how much some of the most common types of retail tenants spend on rent.
Retail tenant type and average percentage of sales spent on rent
- Electronics and appliance stores — 2.09%
- Health and personal care shops — 3.37%
- General merchandise stores — 3.86%
- Food and drink establishments — 5.81%
- Furniture and home furnishing stores — 5.98%
- Clothing and accessory outlets — 7.66%
Calculating the Monthly Rent for a Retail Space
In some retail markets, rent is quoted as price per square foot per month, while in other markets retail rents are quoted as price per square foot per year. For example, $1.50 per square foot per month is the same as $18.00 per square foot per year ($1.50 x 12 months).
To calculate the monthly rent for a retail space, we multiple the rent per square foot by the total square feet of leased space, and add any ‘net’ charges and percentage rent amounts to determine the total monthly expense:
- Base rent: 5,000 square feet x $18 per square foot = $90,000 annually / 12 months = $7,500 per month
- Net charges: $2 per square foot per year x 5,000 square feet = $10,000 annual cost / 12 months = $833 per month
- Percentage rent: 3% of gross monthly sales of $50,000 or more, estimated monthly sales of $125,000 x 3% = $2,250 ($125,000 – $50,000 = $75,000 x 3%)
- Total estimated monthly retail rent = $10,583 per month
Extra Costs to Consider When Renting Retail Space
Here’s a recap of some of the extra costs to consider when renting space, in addition to the base rent expense.
Base rent increases
Also known as a “rent escalation clause,” annual rent increases for a multi-year retail lease are usually negotiated in advance and can result in the retail base rent increasing by 3% or more each year.
Repairs and HVAC
Depending on the lease’s terms and conditions, retail tenants may be responsible for repairing items such as heating and air conditioning (HVAC), interior plumbing and electrical, and broken glass.
Common area maintenance (CAM)
CAM expenses are the landlord’s costs for maintaining the common areas shared by all tenants and customers. They apply to shared parking lots, outdoor lighting, public restrooms, and landscaping. Costs are typically passed through to each tenant based on the tenant’s pro-rata share of space leased in the property.
Erecting interior walls, building dressing rooms, repositioning HVAC ductwork, and installing trade fixtures such as a commercial kitchen may trigger additional code requirements, permitting fees paid by the tenant, and reviewed by city inspectors.
Landlords require rental tenants to obtain liability insurance as a condition of the lease, naming the landlord as an additional insured, to protect the property owner against claims made due to injuries, theft, and business interruption sustained by the tenant’s customers or employees.
Factors Impacting Retail Lease Costs
The Global Mid-Year Retail Outlook 2021 from CBRE predicts that after a year of limited social interaction, consumers are ready to spend in the experiential and service-based retail categories.
While the demand for retail property in Sun Belt and secondary cities such as Phoenix, Austin, Denver, and Charlotte should continue to be robust, retailers will feel increasing pressure to adapt:
- Locations with retail space in high traffic and high visibility locations demand the costliest rents.
- Retail space that is move-in ready allows landlords to charge more compared to suites that need extensive improvements and remodeling.
- Longer lease terms from businesses with proven track records may give tenants an edge when negotiating their retail lease.
- Competition from other retail tenants for prime retail space in high-growth cities and desirable submarkets also impacts retail space costs.
Where to Find Retail Space for Lease
Hiring a local tenant’s broker and online brokerage site are two of the best ways to find a perfect retail space for lease in any market nationwide.
Local commercial real estate brokers have in-depth knowledge about the markets and submarkets seeing the highest demand for retail space for lease. Online brokerage sites are the ideal source for tenants looking for available retail space, with featured listings, asking retail rents, property information, neighborhood demographics, and market trends.