3 Types of Consumers that Drive Retail Today

It seems everyday a new article highlighting a failed retailer or brick and mortar closures hits the headlines, spreading a dooms day effect of retail being 'dead.' While brands and stores are inevitably closing, we need to pay attention to what is closing and WHY these retailers aren't hitting the mark. Because, in fact, over 3,800 more stores are opening that closing in 2018 among big chains— and through the first seven months of the year, retail sales are up $190 billion according to IHL’s Retail’s Radical Transformation/Real Opportunities.

I'd argue retail isn't dead, but the consumer has just changed, taking some players who have not adapted out of the game. Let’s dive into today’s modern consumer and what it takes to be a real winner in today's retail landscape:

THE IMPATIENT CONSUMER: BUSIER THAN EVER

Let’s face it, today’s consumers lives are busier than ever between the demands of dual working parents, children in a myriad of activities and the constant demands filling calendars and time. Because of this, ‘consuming’ retail has become another task, and these consumers value their time more than ever. Consumers are demanding an easier way to get the products they need without it being a huge disruption to their lives.

There is no wonder why the department store is struggling the most with capturing this type of consumer, as strolling through a department store to find the perfect dress or pair of shoes is a thing of the past and consumers value their time more than ever. People are doing their shopping at work, in bed, in the car, and generally on-the-go to fit it into their busy lives. On top of this, Millenials and Gen Z consumers grew up online, and are more comfortable than ever with skipping the ability to touch, feel and even try on their products in a quest to save time and convenience.

THE INFORMED CONSUMER: TECH SAVVY

These same consumers are more informed than any generation that has become before. Retailers use to be the place for consumers to find inspiration and discover new products in a new & exciting way. Today, consumers primarily discover their products online and are exposed to around 4,000 to 10,000 ads each day. Because of this, many consumers begin to prioritize value and will shop around online to find a good deal on a product they want.

Because of a consumers ability to quickly get online and see if consumers before them have loved or hated the product, retailers are faced with an extremely informed consumer. Consumers have the ability to be interconnected and share opinions and thoughts on products to a platform of people like never before. The consumers are trailblazing what they want, and brands need to stay in pace and understand the consumers needs & wants or get out of the way for the brands that do.

THE INVOLVED CONSUMER: VALUE EXPERIENCE

Finally, today's modern consumer values an experience over a product more than ever. Millennials and Gen Z consumers are not afraid to voice opinions, welcome change and care more than ever about the quality of their life. The 'American Dream' has greatly shifted and retailers are needing to respond as a result. Retailers cannot rely on the amount of products stocked on their shelves or simply their history to earn consumer's loyalty.

Consumers want brands and retailers who stand for more than delivering products and services, they want a brand who stands behind things they care about. In addition, they want a brand that cares about their customer experience, who responds promptly and positively to how they feel. They want a brand they can interact with and feel connected to-- via online platforms such as Twitter, Facebook, and Instagram. A retailer's brand is more important than ever in this highly experience driven world and they need to be consistent in delivering consumers the experience they want and expect.

THE REAL WINNERS

While today's consumers are demanding on all fronts, retailers who successfully capture all three of these consumers are few & far between. Instead, retailers need to FOCUS on the type of consumer they want to capture and focus efforts there instead of constantly trying to keep up with the competition on platforms in which they simply cannot compete. In the same sense, retailers shouldn't be afraid to pivot their direction based off their consumers needs, and continually re-look at the value they are adding to the lives of those consuming. Retailers need to be focus on connecting with their consumer outside of their brick & mortar locations, which will drive more consumers to go and experience what they have to offer.

Inevitably, retailers will 'die' and new retailers will emerge in this ever changing retail landscape. But is retail 'dead'? No, retail still and will continue to serve an important purpose in today's society. People enjoy socializing at a coffee shop, the camaraderie of a workout class, and the ability to shop for clothing in person. While retailers face the most competition and demanding consumers ever, the real winners will be the retailers who capture today's consumers needs best and most effectively-- focusing on their core competencies and staying in their lane amongst ever growing competition.

The Sale Leaseback: Combatting Common Concerns

You purchased your first commercial property 5 years ago for $1M in a prominent location. After constructing the improvements on the property you are all in for nearly $3M. Your business is thriving and you would like to take your concept to another location. Only problem? You don’t have enough cash to do so. Your first property required you to put up $600K after your conventional lender valued your limited your financing at an 80% loan to value ratio. You know the costs you have in your first property and are weary of these limitations as you look into expansion.

What solutions do you have besides getting locked into a restrictive conventional mortgage in addition to putting down another $500K+ of your own equity? Look no further than the sale leaseback— a financing solution for a property owner looking to generate cash while retaining control over its real estate.

Let’s explore the sale leaseback more, specifically from the most common concerns we hear and how the sale leaseback combats these:

CONTROL— I enjoy the control I have as a property owner today.

Most buyers in sale leasebacks are looking for a strong, predictable investment property that they can be hands off when it comes to the day to day operations. Ultimately, the goal of the transaction would be for the seller/lessee of the real estate to retain nearly all the benefits of the ownership while continuing to occupy the property as before with a fixed lease term. (Their investment is only as valuable as the long-term success of your business!) In a triple net lease structure where the tenant is responsible for paying property taxes, building maintenance and insurance in addition to base rent, this structure provides the seller/lessee with maximum control of the property despite having passed title to a new buyer.

COSTS— I’m skeptical of paying rent payments as a lessee and how this number will be evaluated.

When potential buyers value a property, they are looking in terms of cap rates and returns, similar to that of an interest rate of a conventional lender. The sale leaseback essentially is a complete cash-out refinance of 100% of the building value with interest-only payments coming in the form of rent. Because of this, what is received in cash will be a direct reflection of the rent payments to provide a buyer/lessor of the property a fair return on their investment. This price/rent payment is completely negotiable within reason, but likely as the current owner of a property this process will be advantageous for you. You can negotiate knowing you are in the driver’s seat, not competing with other tenants for a space and are less likely to have to conform to the buyer’s wants as a result.

TAXES— I’m enjoying the tax benefits of ownership including depreciation of the property’s improvements.

Yes, ownership of commercial real estate provides great tax savings— one notable thing being taking depreciation of the improvements of the property. In turn, the key tax advantage of an authentic sale-leaseback is that the rent payments under a lease are fully deductible. While depreciation deductions are limited by the cost of a property, rental deductions can be equal to the fair market value of the property and are not limited by the depreciation schedule. In addition, one of the most notable advantageous sides of executing a sale leaseback for the seller/lessee is the strength it provides to the balance sheet by reflecting a lower amount of financing.

FUTURE— How will this affect the future of my real estate and business?

Finally, a sale leaseback can provide several benefits as you look at the future of both your property and business. First off, if you already know keeping your property in the long term is not something you are looking to do, selling your property with a stable, credit-worthy business on it now is how you will ensure receiving 100% of the fair market value in the purchase price. In other words, a buyer will be far more motivated to buy your property now knowing the potential & predictable return promised with your successful business on it. In the same sense, a buyer of a sale-leaseback may not be the same buyer who would be looking to buy your business. Separating these two sales will only increase the value of both assets, allowing you to get the fair market value of the property and the fair value of your business later.

Despite having its upsides, just like any financing method, the sale-leaseback is not a one size fits all solution for all business & property owners. Taking the time to carefully review your balance sheet and financials alongside your goals and future plans for your business with a CPA or trusted advisor is always the best path. There are some great resources out there as well— we would recommend the Net Leases and Sale-Leasebacks: A Guide to Legal, Tax, and Accounting Strategies book for a deeper dive into the caveats of the implications of this type of transaction.

Comment below if your business will be taking the next steps towards a sale-leaseback this calendar year or if this is financing solution you would consider. Happy New Year!

Thirty Eight Properties LLC

Minnesota Commercial Real Estate Specialists

Contact Us: info@38properties.com or (612) 290-7195

Lease Negotiations: 4 Essential Landlord Terms

With commercial leases ranging in size from a few a pages to hundreds, it is difficult to know what are the most important terms for a landlord to focus on when signing a new tenant. Here is our list of lease terms to focus on in your next negotiation.

LEASE TERM.

From a landlord's perspective, security and the knowledge that rent is coming in each month to cover the costs associated with the property is worth the headache on the front end of negotiating a strong lease term. Tenants will want flexibility, including lease options to give them the ability to leave a poor performing property with an equal ability to stay in for an agreed upon price. As a landlord, look for a tenant who is willing to sign a long term lease as it demonstrates confidence in both their business and the property to perform at a high level for years to come. Remember, signing a new tenant is expense between attorney expenses, TI dollars, etc.

CREDIT & GAURANTEES.

In the same sense, be weary of signing an over optimistic tenant who has no supporting financials or is unwilling to sign a guaranty as a result. You want to feel confident that your tenant will have the ability to perform for the duration of the lease term. Take the the time to gather and analyze financials, history, and any relevant information you can be provided on the company/tenant you are signing on. Look to have a guaranty signed for an extra layer of security for smaller shops or a corporate business who is willing to back a failed franchisee as well. Remember, proper due diligence on the front end will result in a smoother relationship with tenants and longer lasting occupancy & cash flow for your properties.

ESCALATIONS & INCENTIVES.

Base rent is important, but perhaps an overlooked tool in setting such terms is the ability to create escalations and provide incentives for early years. Opening a new location is expensive for tenants, between improvements/property buildout, hiring & training new employees, and the time/costs that go into lease negotiations. Because of this, many tenants are motivated by lowering their upfront costs, and are willing to reflect their rent this way as a result. If you have the ability, provide higher incentives with increased TI dollars, abated or free rent, and a rent structure that escalates over the long term. This could be a win-win for all parties, and ultimately could get you more rent in the long term if structured properly.

EXCLUSIVES.

If your property contains more than one space to fill, sign tenant exclusives carefully. For example, if signing on a sandwich shop, do not agree to an exclusive that states that "no business that prepares & sells food shall occupy the premises" as this restricts all potential food users. A more proper exclusive would simply restrict the preparation & sale of sandwiches, allowing you as the landlord to sign on more types of users. Address this issue directly with a tenant, as often times tenants are willing to re-word an exclusive to achieve their goals while leaving you the ability to work with different tenants.

While this list highlights only some of the most important terms a commercial landlord should focus on during the lease negotiation process, there are many other terms that a landlord should become well acquainted with. A great resource to do so is this extensive Real Estate Terminology list. As always, investing in a strong legal partner is worth understanding the caveats of each lease prior to signing.

Thirty Eight Properties LLC Minnesota Commercial Real Estate Specialists

Contact Us: info@38properties.com or (612) 290-7195