Retail businesses sell goods and services directly to the consumers who will use them. A retail space is a brick-and-mortar storefront for these companies to sell their goods and services to shoppers. When looking for a retail space, it is important to plan for your budget and square footage needs ahead of time and to understand some basics about commercial property leasing.
TL;DR (Too Long; Didn't Read)
At its most basic, a retail space is a commercial property used by a company that sells goods or services directly to the buyers.
What Is a Retail Business?
Retail companies are those that sell products or services to individuals for their own use. Retailers are similar to wholesalers, but wholesalers sell their goods to other companies that sell them to consumers. Retail sales can take place online, through catalog sales, in apps or in brick-and-mortar storefronts. Ultimately, the factor that defines whether a company is a retailer is whether or not the end user is the one who bought the goods or services, not how the products are purchased.
There are approximately 3.7 million retail establishments in the United States, ranging from grocery stores to mechanic shops. Retailers employ nearly 42 million people, making it the largest sector of private employment in the U.S. There are four major categories of retail items:
- Hardlines: Big-ticket items that last for a long period of time, including cars, furniture and appliances
- Soft goods: Items that you buy and go through regularly, such as clothing, shoes and toiletries
- Food: Anything you eat or drink, whether it is a meal in a restaurant, a beverage, a snack or ingredients for home-cooked meals
- Art: Not just works of art like books and music but also things used to make art, like musical instruments
Different Types of Properties
To understand exactly what a retail space is, it is important to first understand what kinds of real estate properties exist. Generally speaking, there are four types of properties: land, agricultural, residential and commercial.
Land is undeveloped property that may be used for agricultural, commercial or residential purposes or a combination of these three purposes depending on the property's zoning restrictions. Agricultural property is that which is used to produce food, which may mean fields, orchards, farms, ranches, dairies, timberland or a combination of these purposes.
Residential properties are single-family homes, manufactured homes, co-ops, and lofts. Although these can be rented out to generate money, they are generally owned by an individual and are not a sufficient money-making enterprise for the owner to refrain from needing other sources of income.
Types of Commercial Properties
Commercial properties are those that are owned for the purpose of making money, which may range from a gas station to a customer service call center. Commercial real estate can be broken into five categories:
- Retail: While retail companies are those that sell goods or services directly to the buyer, not all retailers operate from retail properties. This is because retail spaces are brick-and-mortar locations where the goods and services are sold to the buyer in person. Many retailers only handle sales online and over the phone, meaning they operate from an office rather than a retail space. Commercial properties used for retail purposes include single-tenant stores, grocery stores, restaurants, strip malls and shopping malls.
- Office: These properties are where business takes place, but the majority of customers do not visit them. Like retailers that sell items in catalogs and online, most auction companies generally operate from office spaces, renting a room for the purpose of the auction or even exclusively using a reserve auction system online. Office real estate can include single-tenant buildings, multi-company professional buildings, skyscrapers and even massive, single-company campuses like those operated by Google or Apple.
- Industrial: Industrial properties are generally those used for companies that make or store things on a massive scale. This could include warehouses, power plants, factories, junkyards and more. These sites often have height specifications and docks for large trucks and/or construction equipment.
- Multi-family: While most areas where people live are considered residential properties, apartment and condominium complexes with four or more units are usually classified as commercial because they are operated for the purpose of earning money. They can range from a garden apartment complex with four or more small, unattached units all the way to a 100-floor skyscraper apartment building in a major city.
- Miscellaneous: There are many other investment opportunities for commercial property owners. These can include hotels, theaters, sports facilities, bowling alleys, amusement parks and other areas used for leisure; hospitals, dentist offices, nursing homes and laboratories designed for health care purposes; and even more difficult-to-classify real estate offerings such as self-storage, car washes, marinas and funeral homes. There are also special-purpose properties that are publicly held, such as libraries, schools, cemeteries and parks.
Retail Space Grades
Commercial real estate is organized with a simple grading system that classifies all properties as A, B or C ranking based on its specific market. These grades provide an easy-to-understand indicator to better estimate the quality and market value of a property. While this system can make it easier to quickly differentiate properties, it is not an exact science, and some retail spaces may be right on the borderline between letter grades.
Retail Space Class A Characteristics
These are the best-possible properties in a given market. They include high-end construction techniques, quality interior detailing, highly-sought-after design, desirable property amenities such as valet parking or sustainability measures and state-of-the-art mechanical systems and technology such as top-of-the-line sprinkler systems.
For retail properties in particular, these properties will generally be located in a good area with high foot traffic. These buildings generally have the best management and attract the best-quality tenants that can afford the high rates commanded by these properties.
Retail Space Class B Characteristics
As you might imagine, class B buildings are one step down from class A structures. The buildings may be a little older, and they may not attract quite as much foot traffic. They will still be well maintained and not functionally obsolete and tend to attract above-average rents, but compared with class A properties, they will offer a less-expensive lease space, meaning they can provide attractive opportunities to retailers that can't afford a class A property but still want to impress customers.
The quality of tenants can also affect a multi-tenant retail area, as a shopping center filled with luxury-goods companies will naturally be rated higher than one filled with discount shops. Class B structures can sometimes be reclassified as Class A properties if they undergo renovations to upgrade the appearance, amenities and technology of the space.
Retail Space Class C Characteristics
As the lowest rating, these properties are the least desirable and command the lowest rents. They may be barely functional, may feature outdated technology and ugly or unfashionable designs and will generally be in need of maintenance, upgrades and renovations.
They may also be located in less-desirable areas than what most people want for their lease agreement, meaning that retail companies such as furniture rental shops, liquor stores and gasoline stations may do well, but many companies that rely on foot traffic from those with plenty of disposable income will not thrive in these areas.
Deciding on Your Needs
When budgeting for a space, remember that experts say that a retailer should pay no more than 8% of its annual revenue on the yearly rent. Don't forget that in addition to your lease payment, you will most likely also be expected to pay for utilities, property taxes and insurance for your space. Also remember to budget for the down payment and deposit when looking for a new property.
Once you have figured out your budget, figure out how much space you will need. Do this by mapping out the various work spaces, POS stations, fixtures, inventory space, offices, kitchens, bathrooms, dressing rooms and/or any other areas you will need in order to operate. Use this to estimate your total square footage needs.
Square Footage Lease Space Meaning
When considering the lease space of a property, many renters find themselves confused by the mention of both "usable square feet" and "rentable square feet" in the listing. These are two very important terms with which to familiarize yourself when hoping to lease a retail space. Basically, usable square footage is the space your business will actually occupy, and this must be larger than the minimum square footage you previously estimated.
Unless you are occupying a single-tenant property, you will also have access to common areas which may include bathrooms, hallways, kitchens and more, and this is where rentable square feet comes into play. When leasing a commercial property, you will be expected to pay for a portion of the common areas equal to your portion of the structure's total usable space. So, if a unit is made up of four equal-sized retail locations, for example, each lessee would be expected to pay for a fourth of the communal space. This portion of the common space is added to the usable square footage to come up with the total rentable square footage.
Generally, the rent for communal spaces will be cheaper than those that are exclusively rented to a particular company, but the cost of these areas can still add up, which is why it is important to review and fully understand your lease before signing to ensure you won't be surprised by your monthly rent or be left paying too much for building amenities that will not benefit your company.
Deciding on the Right Location
Once you have found a few properties that may work for you, it is important to compare these prospects to find the best location for your business. Start by comparing the basics of each building by looking at the total cost of the lease and utilities as well as which amenities are available. Next, consider area factors that may affect your business, such as:
- Foot traffic
- Parking availability
- Public transportation options
- The size of the neighborhood and number of residents or visitors
- The demographics of residents and visitors
- The level of activity during your business hours
Potentially compatible businesses
for example, if you want to own a late-night eatery, nearby bars and colleges can be beneficial
* Local competition
When considering competition, don't immediately assume that competition is a bad thing, as it could mean that a retailer offering similar goods and services is an indicator that people in the area want what you are selling. For example, if you are in an area where people value their technological devices, the fact that there's already a computer repair store in the same area in which you want to open a repair shop can actually be a good sign. On the other hand, you should always be wary of market saturation.
- CrowdStreet: Making the Grade in Real Estate: Understanding Class A, B and C
- Shopify: Retail
- 42 Floors: What Is Commercial Real Estate? The Definition of CRE
- Lumatax: Things to Consider Before Renting a Retail Space: A Comprehensive List
- 42 Floors: What is the Difference between Usable vs. Rentable Square Feet?
- BiggerInvesting: 6 Types of Real Property [Infographic] Real Estate Investing