Commercial real estate not only requires a deep understanding of the market but also of different tenant types. One critical tenant of any successful commercial retail or office property is the anchor tenant.
What Does an Anchor Tenant Mean?
An anchor tenant is a large and well-known business that occupies a significant amount of space in a commercial real estate property. This type of tenant is often the first tenant to sign a lease agreement with a developer or landlord, and is crucial to the success of the property.
These tenants “anchor” a commercial office or retail property in at least a few ways:
- The rents, although often discounted on a per-square-foot basis, account for a large portion of the property’s revenue simply because of how much space the tenant pays for.
- The tenant’s brand name and product/service offerings attract people to the property, and those people may stop at smaller tenants’ stores/offices.
- Other, often smaller, tenants are usually more willing to sign if they know anchor tenants have already signed.
These tenants tend to be much larger than most other tenants at a property. Whereas most smaller tenants might occupy 1,000-5,000 sq. ft., anchor tenants might occupy 10,000-50,000 sq. ft.
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How Important are Anchor Tenants in a Commercial Investment?
Anchor tenants are an essential component of any commercial retail investment, and also of many commercial office investments. They’re responsible for drawing the majority of a property’s foot traffic, and many other tenants would fail without the anchor’s traffic.
In addition to stabilizing foot traffic, anchor tenants also stabilize a property’s finances both in the immediate and long term.
The anchor’s rents are often lower on a per-square-foot basis than other tenants, reflecting the greater importance of an anchor. Because they take up so much space, though, their rents are a larger percentage of a property’s revenues. Anchors also are established businesses that should have the cash flow necessary to make monthly rent payments.
The build-out of an anchor tenant is substantial merely because of their size. Because of this and that they’re unlikely to go out of business, their leases tend to be longer, often ranging from 10-25 years (depending on many factors). This ensures that there will be substantial rent coming in for years into the future.
Examples of Anchor Tenants
Anchor tenants are typically large and well-known businesses that have a strong reputation and brand name recognition.
In office buildings, the anchor tenant is usually a major bank located on the first floor. For instance, J.P. Morgan Chase, CitiBank, or a well-known local credit union might be just off the main entry doors. Banks bring in more foot traffic than most other similar services that need office space.
In retail buildings, anchor tenants are usually national chain retailers. They’re sometimes Best Buy, Macy’s, Target, Wal-Mart, or, increasingly, the Apple Store. According to a Goldman Sachs report, 75 of the 100 largest malls in the U.S. have an Apple Store. Even though Apple sells a relatively narrow line of products and has somewhat small stores, these stores bring in a lot of foot traffic compared to other retailers.
As the landscape of retail changes, more and more commercial real estate investors are turning to alternative anchor tenants. Alternative anchors might be grocery stores (common in strip malls), gyms, and theaters.
For a real example of the influence that an anchor tenant can have, consider Grand Central Station in Manhattan. Few people outside Manhattan residents know the station’s 200 Park Avenue address. Many recognize Grand Central by its alternative names: the MetLife building or PanAm building. MetLife and PanAm have been anchor tenants of the station for many years.
How Do Anchor Tenants Affect Other Retailers?
Anchor tenants are essential to attracting and retaining other tenants, especially in retail properties where foot traffic is most important.
Signing an anchor tenant boosts a property’s reputation. Many smaller tenants will see the anchor tenant as a show of confidence in a property and its management, and therefore be more willing to themselves sign.
Many smaller retailers also rely on anchor tenants for increased foot traffic and correspondingly increased sales. A salon or coffee shop that might struggle to attract sufficient foot traffic in other locations could have plenty of passersby if located near an anchor tenant.
Since other tenants rely on an anchor for foot traffic, space closest to an anchor tenant can be at a premium. In larger properties where there’s more than one anchor, the anchor tenants should be spaced out so that other tenants are willing to consider multiple locations in the property.
How to Attract Anchor Tenants for a Commercial Space
Attracting anchor tenants to a commercial property can be challenging, as these tenants are typically very selective and have specific requirements.
Most importantly, commercial property investors should be ready to accommodate anchor tenants’ demands. These can be reduced rent rates, paid-for build-outs, and even input on what types of other tenants can move into the property. An anchor tenant won’t want a close competitor (whether another anchor or a smaller tenant) on the same property. They also won’t want tenants that detract from the property’s reputation.
In addition to being willing to accommodate, investors can also help their case when pitching to anchor tenants by considering:
- Location: One of the most important factors for anchor tenants is location. They want to be in a prime spot that has high visibility and easy access for customers. Not only should a property be in a good location, but an anchor tenant will want the prime location within the property.
- Visibility: Anchor tenants will want great visibility to people driving by the property. The anchor will likely expect to be the largest name on the property’s roadside sign, and the anchor will probably want a sign on the exterior of their space. The largest anchors in noteworthy buildings get their names lit up near the top of the building (e.g. MetLife in Grand Central Station).
- Demographics: Anchor tenants also want to be in areas with a large customer base that matches their target demographic. Developers should research the demographics of the area and make sure that the anchor tenant’s customer base aligns with the local population.
- Space: Anchor tenants require a significant amount of space, so landlords and developers should focus on properties that have enough square footage to accommodate their needs.
- Incentives: Developers can offer incentives to anchor tenants to help entice them to sign a lease. This can include things like rent abatements, tenant improvement allowances, and other perks.
Wrapping Things Up
If you’re investing in non-residential or mixed-use commercial real estate, you’ll almost certainly need an anchor tenant to have a successful property. Spend some time identifying the most interested anchor tenants and how you can make the property especially attractive to them. Then, secure leases with anchor tenants that’ll serve your property well.