Anchored down

Finding an appropriate anchor tenant is critical to ensuring the success of a retail property. When looking at anchor tenants, property managers sometimes have the tendency to think in terms of “good” and “bad.” I believe it’s more appropriate to think in terms of suitability: Is this tenant a suitable fit for the property?

I’d like to introduce two case studies from my experience in Hongqiao, Shanghai, that demonstrate how suitability influences anchor tenant selection. These two retail properties provide excellent examples of the role that anchor tenants play in a property, how property managers should work with anchor tenants, strategies for signing anchor tenants, and how to maintain a good relationship with these tenants.

Hongqiao is a development outside of Shanghai’s central business district (CBD) that was previously an immature commercial area with limited residential neighborhoods within walking distance.

Go with what fits

The first property we’ll look at had been closed for two years for renovation. One downside was that it was outside of the downtown/CBD area and did not have direct access to a subway line. The landlord had been successful in Hong Kong but did not have a track record in Shanghai. The project was positioned for middle-end family consumers.

The role of anchor tenants in a property like this are severalfold. First and foremost, anchor tenants deliver foot traffic to a property. They draw customers in and then channel those customers throughout the property.

Thus, we need to utilize the anchor tenant to communicate with these customers by identifying to the market the project positioning. An anchor tenant like Zara or Uniqlo is a clear signal that the positioning is middle-end, whereas Prada and Louis Vuitton would signal high-end.

This positioning also helps deliver other tenants to the building. These are smaller and medium-sized brands that will see the anchor tenants and understand whether or not they would be a suitable fit for the property. Usually they wait to see which anchor tenants sign with a property before committing themselves.

One thing to note, however, is that anchor tenants understand the important role they play. They are in a position of relative strength. The result is that they sometimes pay a lower rent. This can mean longer lease terms of up to 10 or 15 years or pure turnover rent based on a percentage of their sales revenue.

Anchor tenants can also require more resources. They may ask for advertising resources such as advertisement space, a higher power capacity than other tenants, or other special considerations.

Because this first property had been closed for two years, we knew we needed a strong anchor tenant—or perhaps a group of several anchor tenants—to build market recognition.

In this case, we were talking with the fashion retailer Inditex, which runs a number of different brands such as Zara, Massimo Dutti, Oysho, and others. It was definitely big enough for the project. It required a lot of advertising resources, which we could provide, and wanted pure turnover rent, which we could also accommodate. But it wanted to place seven of its own brands in the shopping center.

This gave me pause. I had allocated 28% of the space in the mall to fashion, and including all seven brands would have gone over that allotment. It would have meant less diversity—less room for signing brands in other categories to create something different.

What was my strategy to negotiate with and ultimately sign this anchor tenant? I typically use the following five steps:

1. Introduction—Before making any offer, I provide anchor tenants with detailed background information about the project; information such as positioning, brand mix, and trends. The more they understand my project, the more confidence they will have in me and the more willing they will be to work with us.
2. Needs analysis—I also make sure to understand tenants’ true needs before making an offer. Do they want to open because the location is good for them? Or because the project has a similar customer base? Or is it because competitors have shops in this area already? I need to know their requirements, so I can offer what they need.
3. Objection handling—We also need to understand anything that could prevent them from signing with us. Identifying objections allows me to provide support to handle their concerns or else offer something to change their mind.
4. Solution—Once we understand all the requirements, we then work to offer a suitable package. If, for example, a tenant cares about cash flow, perhaps we can offer reduced rent at the beginning of a contract that increases in the second year. We aren’t looking for good or bad, but suitable; something that works for both sides and for the property itself.
5. Closing—Once we’ve shown a tenant what we can do and offered them what they need, closing becomes straightforward. The key is to remember that we’re not just selling a space, we’re selling a future—a good future with good business.

In the case of Inditex, I sat down with them to explain what I was seeing: Four of their brands matched the project positioning, namely Zara, Zara Home, Massimo Dutti, and Oysho. The other three brands felt too “young” for the target customer base, and we had concerns about the allocation for fashion. They understood, and we were able come to an agreement. In the end, the mall reopened, and all of the brands ended up seeing good business performance results.

Giving shoppers what they want

The second case study was in the CBD area of Hongqiao. The positioning here, too, was targeting middle-class families. The demographics nearby included many people from Hong Kong, Taiwan, Singapore, Korea, and Japan. The anchor tenants in the project included Under Armour, Uniqlo, Adidas, H&M, and Zara.

I’d like to look specifically at the second floor of that property. One of the anchor tenants here was Hotwind, a local Chinese fashion brand that targeted younger people spending an average of $5–$8 per head. Hotwind tried different strategies, but nothing seemed to work, and after a year revenue continued to decline.

It was clear that we needed to find a more suitable anchor tenant for this part of the property. We decided to go with Muji, a Japanese clothing and houseware brand. Muji was more recognizable to the local residents, and the positioning matched as well, as Muji targets midlevel families spending on average $8–$30 per person.

The resulting shift was dramatic: Monthly sales revenue increased by 389%, and monthly rent income increased by 233%. It’s important to note that this doesn’t mean Hotwind was a bad anchor tenant, only that it wasn’t a suitable one in this case.

Finding and securing a suitable anchor tenant is a complex task. A property manager needs to have a full picture of the needs of the tenant, the needs of the owner, the context of the property, and details about clientele. But working with these tenants can be incredibly fulfilling and rewarding. It takes emotional intelligence, financial calculation, and market strategy. These skills combined can bring out the best in your properties for both tenants and owners.