Every successful development has to turn a profit, and any developer worth their salt will make sure the numbers work long before a shovel hits the ground.
But, even within the spectrum of building “in the black” there’s a big difference between a developer who prioritizes long-term value and one who’s focused on short-term profit.
These different mindsets will affect everything from tenant selection to material choice, and they’ll have a direct impact on the experience of the retailers and their customers. Today, we’ll delve into the benefits and setbacks of each of these philosophies as it relates to the tenant.
We’re also aware that there aren’t only profit or value minded developers. Instead, these two philosophies identify the ends of a spectrum, on which every developer exists.
Short Term Profit vs Long Term Value in…
Retail Site Design & Materials
The design of a retail site passes several sets of eyes before it becomes a breathing part of our city. Site design will stipulate where the access points are located, parking numbers, bay sizes and orientations, and landscaping. The materiality of the site will dictate the aesthetic and the lifespan of the façade.
All of these factors have a significant impact on how customers experience the site.
A developer motivated by short term profits will look to make the lowest possible investment while still satisfying the base requirements of the municipality (bylaws, etc.) and remaining marketable to tenants.
In today’s market, a rectangular building, subdivided into 1,000 to 1,200 SF bays with a stucco façade and a fence around the exterior could epitomize a retail development built for short term profit.
This philosophy focuses on creating a building that satisfies the minimum needs of today’s retailer and consumer, without consideration for enhancing the experience. The benefit to the tenant is a share of those reduced costs through reduced rental rates.
The inclusion of landscaping throughout the site, varied setbacks between bays, multiple access points for pedestrians and vehicles, and a sense of arrival for the site’s visitors are a few of the trademarks of a retail site built under a long-term value philosophy.
These inclusions create higher up-front costs for the developer, but they also provide longevity and a more pleasant experience for consumers.
Instead of having to renovate or re-imagine the site in a few years, the upfront investment in quality gives the site a longer lifespan.
Tenants and customers end up with an environment they can enjoy and depend on for years to come.
Tenant selection is a nuanced process, and a lot of it has to do with the current market conditions. Supply and demand will dictate how difficult it is for a tenant to secure space and what the rental rates are in their market. Whatever the market conditions, there are some important criteria applied by developers of each mindset.
When short term profit comes first, an open sign is better than an empty bay no matter who’s filling it. Developers with a profit mindset are more likely to invite any tenant into their development as long as they can reasonably prove they’ll be able to make the first few month’s rents. The goal is to start bringing in revenue today.
Some developers are often only interested in the optics of a full building, and will actively adjust rents and incentives to attract tenants and turn the investment around for a lucrative sale.
While this could lead to lower lease rates and more favourable lease agreements for the tenant, there’s no guarantee in continuity once the development is sold. But, for tenants willing to operate under that level of uncertainty, good deals can be found.
A value mindset requires more deliberation and foresight when it comes to tenant selection. For the development to be successful in the long-term, a developer needs to ensure that the tenants are a good match for the neighbourhood and for each other.
There’s more to it than honouring non-compete clauses in tenants’ lease agreements. Instead, landlords must take care to create a development where retailers, professional services, and other businesses can benefit from on-site interactions and opportunities.
The right tenant mix is also necessary to ensure the development provides value for the neighbourhood and the city. Residents won’t be able to form a stable and trusting relationship with the development if it’s filled with “fad” tenants that are here today but gone tomorrow.
The right balance of stability and consumer discovery are necessary to keep the development interesting and trusted by those who use it.
Covenant is often overlooked and poorly understood in the leasing process. It’s intricately tied to tenant selection but is significant enough that it deserves separate attention.
In simple terms, covenant is a measure of financial stability. And stability, as we mentioned above, is an important component of the value-minded developer’s philosophy.
Strong covenant can be hard to come by, and proving one's covenant requires additional steps and paperwork.
A developer interested in filling space as quickly as possible won’t have significant covenant requirements as these measures can slow down the leasing process and could scare off potential tenants.
Instead, a mandate for short-term profit encourages the landlord to take on increased risk, lower covenant requirements, and fill empty bays as quickly as possible. While this will increase revenue in the short term, it increases the likelihood that businesses might fail before their lease is complete, creating unplanned vacancies that must then be filled.
For the tenant, this appetite for risk can create opportunities for those who lack significant capital backing, as it allows them to find a space where they can put their business plan to the test.
With a long-term value mindset, it becomes worthwhile for a developer, or landlord, to set high covenant requirements and to take the extra time to verify a tenant’s financial strength. That’s because there’s more value to the development’s users (employees, customers, and clients) when the space remains full and vibrant over a long period.
Tenant turnover affects everyone associated with the development: the landlord incurs costs associated with lost rent and additional marketing to fill vacancies, tenants suffer because there are fewer business in the development to attract customers, and clients and customers suffer because the site loses vibrancy.
What’s right for you?
Sites designed for short-term profit and long-term value both have their place in the market, and retailers will have to decide which type of site works best for them and their business.
At Qualico Commercial, we’re decidedly on the side of value. We believe that a long-term approach to development not only creates better sites for retailers and consumers but that it helps us to build a city that’s equipped for the changes of tomorrow.
Every investment we make in a site’s materials or building systems, and every ounce of scrutiny we add to our leasing process, takes us one step closer to creating an environment that will have long-term value for everyone involved.
Building for long-term value allows us to be more innovative, create more attractive buildings, and, ultimately, be more proud of our work.