This article is part of a larger series on Retail Management.
Often one of the biggest operating expenses for a small business, leasing retail space requires careful planning. You need to set a budget, look for a few quality options, and know how to negotiate your lease to find a place that is cost-efficient and ultimately meets your growing business’ needs.
Let’s walk through the steps on how to find and lease a retail space for your store. We’ve also created a checklist you can use to ensure you’re getting everything you need from your space.
Step 1: Determine Your Budget
It’s helpful to start with knowing what you can afford. Determining your budget will narrow your choices and prevent you from making impulse decisions if you fall in love with a space. The maximum percentage a business should allocate to their lease payment differs depending on the industry. Typically, however, retailers should expect to allocate between 5% and 10% of monthly gross sales to their lease payment.
Set a conservative budget: Be conservative when setting your lease budget because you’ll likely need extra cash on hand to run your business day to day and pay for unexpected expenses.
Below are sample figures from property management company Hartman to give you an idea of how much different types of retail stores typically spend on rent.
Percentage of sales allocated for rent
Clothing and apparel
General merchandise stores
Furniture and furnishing stores
Food and drink establishments
Electronics and appliance stores
Books, hobby, music, sporting goods stores
Health and personal care stores
To calculate what percentage of your business profits will go to your lease payment, simply take the annual cost of rent and divide it by your gross annual income.
Here is a quick sample calculation:
Annual Rent: $150,000
Gross Annual Income: $2 million
Equation: $150,000/$2 million = 8%
This means for every dollar your business earns, 8 cents goes to rent.
Factors that Impact Monthly Lease Payment
Although this list will vary from city to city, here are some of the main factors that influence retail leasing costs:
- Location: High-traffic and high-visibility locations often increase the lease costs as they place your store in a prime place for high foot traffic.
- Demand: If you’re eyeing a convenient location for shoppers—such as a spot with a variety of additional shops around, ample parking space, and other amenities—prepare to pay high lease costs.
- Condition of the space: If a retail space is essentially move-in ready, you’re going to pay a lot more than you would for a similarly sized space that needs improvements or remodeling.
- Equipment: You may need setups and equipment for plumbing, gas, electric, or climate control like walk-in freezers. Depending on what the space is already outfitted with, any existing or included equipment could impact your monthly lease payment.
- Length of term: In general, the longer the lease term, the more bargaining power you have. However, you can still negotiate on short-term leases or for temporary retail arrangements like a pop-up shop or store-in-a-store.
- Lease incentives: If the lease comes with incentives such as regular improvements, then this will add to the cost. To lower lease costs, see if you can negotiate this and handle the upgrades yourself.
- Competition for the space: In many high-growth cities, commercial space is at a premium. You’re not the only potential tenant the landlord is considering, and someone else might make a higher offer to win the retail space you’re eyeing.
Are you looking to lease space for a restaurant? Read our dedicated guides to negotiating a restaurant lease.
Additional Costs Associated With a Commercial Lease
Apart from the lease base rate, there are other one-offs and recurring items you should consider in your budget.
Did you know?
In 2022, the US commercial leasing market was valued at $172.1 billion.
- Property taxes: This cost makes up a large percentage of the expenses when leasing space and varies per state and county.
- Common area maintenance: This cost varies depending on the property’s maintenance needs. Factor in services like security, landscaping, and cleaning, as well as shared space maintenance.
- Utilities: Estimate costs for electricity, water, heat, sewer, internet, and other utilities you’ll need. For reference, in 2021, retailers spent an average 11.18 cents per kilowatt-hour. Some estimates say businesses in commercial buildings pay an average $2.10 per square foot for utilities.
- Construction: Many retail lease spaces are bare, empty, and in need of some construction and design work. Make sure to allocate a construction and interior design budget to make your shop visually appealing and reflective of your business personality. If you are making significant changes, the building may need a new certificate of occupancy.
- Supplies and equipment: While some spaces come with display racks and a checkout counter, many don’t. You’ll need to invest in furniture and equipment upfront—these expenses will quickly add up.
- Insurance: The cost of commercial property insurance varies, but it ultimately depends on the size of the space. Most retailers pay under $45 per month for general liability insurance.
Interested in learning more about insurance for commercial properties? Check out our guide to rental property insurance, which covers providers, cost, and coverage.
Real Estate Agent Fee
If you work with a real estate agent, remember to factor in their fee (also known as broker’s fee). Commercial real estate agents who lease retail space generally charge from 7% to 10% of the total lease costs. So, for example, if you sign a three-year lease at $50,000 a year ($150,000 total), and your agent charges 10%, the broker’s fee would be $15,000, due upon the lease signing.
Fees may also be on a per-square-foot basis. Typically, it works that for each year of your contract, your agent will charge $1 per square foot. For instance, let’s say you lease a 5,000-square-foot building with a three-year lease term, your broker fee would be around $15,000 (5,000 sq. ft. x $3).
Step 2: Decide How Much Space You Need
When it comes to choosing a commercial retail space, one of your biggest considerations is going to be size. You certainly don’t want to pay for space you won’t need, but you also want to have enough space to be comfortable and accommodate growth. The best thing you can do is come up with a general calculation of how much space you need, which will narrow your property search significantly.
Outgrown your first retail space? Check out our article on opening a second retail space and expending you business.
Here’s a basic formula for estimating the size of your sales floor based on sales goals:
Gross Sales Volume ÷ Sales per Square Foot = Size of Selling Space
In addition to your sales floor, you should also be sure to include space for the additional areas of your store, like:
- Dressing rooms
- Backstock/storage space
- Checkout counter
- Employee space/break room
Check out our article on planning your retail store layout for additional information on how to set up your space.
Step 3: Find 4 or 5 Quality Retail Space Options
Now that you have your budget and space requirements figured out, it is time to locate a few rental options. You don’t want to limit yourself to one right from the beginning. Instead, find four or five choices that could work and compare them to one another to determine the best fit. Multiple options will also give you more leverage when you negotiate costs later. Here are the best ways to locate property:
Work with a Listing Agent
When it comes to knowing the real estate market and connecting you with the best spaces, a commercial real estate agent is going to be your best bet. While you can opt to work on your own, an agent will make your life so much easier—navigating legalities, finding spaces, and getting everything in order for closing. The only drawback of working with a professional agent is the commission fee, but in our opinion, the fee is worth it for the service a real estate agent provides.
In terms of finding a commercial agent, you can look to a couple of resources:
- Other commercial tenants: If you know where you want to open your store, ask other business owners in the area for referrals for the agent that they worked with to find and lease their space.
- LoopNet: While primarily a listing website, LoopNet also has a feature to help you find commercial agents. You can search by location, property type, type of agent, and language to help you find a great match.
- CoStar Professionals: CoStar is a great resource for learning all kinds of things about commercial real estate and searching the commercial market. You can also sign up for a free subscription to CoStar to get access to CoStar professionals, which will connect you with a network of commercial agents.
- Google search: By simply typing in “commercial real estate agents + city,” Google will gather commercial agency websites and local agencies that you can contact.
Once you have found an agent, you should also look for certain criteria to ensure they are a good fit:
- Expertise in your specific industry: Especially in larger cities, commercial agents will typically specialize in specific kinds of spaces—office, tenant, retail, etc. Be sure that you are working with an agent that works in your specific industry. Agents with expertise in specific areas will often have special certifications for that area. Learn more in our article about real estate certifications.
- Establishment in your area: You will want to look for agents that work in your specific city or even neighborhood. This expertise means that you will have a competitive edge while searching and negotiating contract terms.
- Reviews and referrals: Look for reviews on your agent and try to get a referral, if possible. This will help you to understand if they are communicative and how well they work with their clients.
- Record of success: Be sure that you choose a commercial agent that has successfully completed multiple sales. This shows that they know how to be competitive and will be able to lead you through the leasing process.
Interview potential candidates: The best way to ensure that you will have a good working relationship with your agent and that you get all the information you need about their career and expertise is to meet with agents and talk to them in person beforehand.
One of your best resources for finding quality properties is Google. Just head over to your search page and type in keywords about the type of space you’re looking for. For example, if I type “600 square foot retail space Denver,” I am met with a list of properties that meet my search criteria from several different sites.
You can check out our guide on the best commercial real estate databases for more resources for finding commercial spaces.
There are also several sites dedicated to commercial real estate listings, including LoopNet, Craigslist, and Catylist. These sites usually include featured listings, lease prices, types of businesses that are allowed to operate in the space, property addresses, and agent contact information. You can also filter your searches by advanced search criteria, including price, square footage,ZIP code, and specific features.
If you are looking for a pop-up space, check out Go–PopUp to find an available temporary space near you.
Step 4. Evaluate Each Potential Location
Once you have found a few good options in terms of space, it’s time to narrow them down based on location. In general, your best retail spaces are going to be:
- A safe area: If customers do not feel safe, they are not going to want to shop in your store. Check out MyLocalCrime, input your ZIP code, and see how your potential location measures up to surrounding areas.
- Where your customers are: Setting up your store in the area where your key demographic or target market lives or works will attract customers. You can use data from the US Census Bureau to look up general demographics for an area or city. You can also try determining the foot traffic of a specific location. And Claritas, a resource where you can input your ZIP code to find and segment the clientele in your specific area, can help you learn about location demographics.
- Near your competitors: Although it may seem counter-intuitive, locating near your competition guarantees that you will have customers that are interested in your product. This can be especially invaluable for new businesses that do not have an established customer base.
- Near other compatible businesses: Retail spaces such as restaurants, bookstores, and coffee shops go well together. Apparel stores work great near makeup and shoe stores, and pharmacies and medical offices work well together. This type of collaboration is a great fit for pop-up spaces.
- Near public transport/major highways or high foot traffic areas: Your retail location needs to be visible and accessible for customers.
Step 5: Evaluate Your Lease
Now that you have a space picked out, it is time to review the lease. This can be a complicated process, especially considering all the legal terminology and lease-speak. This is where working with a commercial real estate agent is helpful. They can help you to determine what should and should not be part of the lease, making sure you make the best decision for your business. Not only that, but they will represent you to the landlord and conduct all lease negotiations.
Did You Know?
The value of commercial real estate was down by 6% in 2021 compared to 2020, primarily because of effects from the COVID-19 pandemic.
Different landlords offer different types of leases. The main differences between lease types are the kinds of costs each party will shoulder. Below are the types of leases you may come across, what they mean, and how they will impact your monthly lease budget:
- Triple Net Lease: Also referred to as a triple N or NNN lease, this is the most common type of agreement. In a triple net lease, the tenant shoulders the majority of the costs, including utilities, taxes, insurance, and maintenance. The landlord is only responsible for structural repairs.
- Single Net Lease: In this type of lease, the tenant is only responsible for paying utilities and property tax, while the landlord takes care of insurance and maintenance.
- Double Net Lease: In this type of lease, the tenant is responsible for utilities, property taxes, and insurance costs. The landlord will shoulder the maintenance.
- Modified Net Lease: In this lease, the landlord and tenant negotiate a split of the maintenance and utility expenses, while the tenant agrees to pay taxes and insurance.
- Short-Term Lease: Commonly used for pop-up and temporary spaces, landlords may customize responsibilities based on the requirements of business renting the space.
In evaluating your lease, you should look for any clauses as they tell you what you are allowed and not allowed to do in your space. Below are some common items and clauses to watch out for before considering a space for your business:
- Exclusive Use Clause: If your business depends on foot traffic, then you may want to try and negotiate an exclusive use clause into the contract. An exclusive use clause prevents your landlord from renting space out to one of your competitors in the same building or shopping complex. This type of clause is ideal for pop-up shops, temporary spaces, or any other kind of cohabitated spaces.
- Renovation or Construction Restrictions: If you need to make alterations to the space, you want to make sure the lease clearly outlines what modifications you’re allowed to make.
- Signage: If you want to post sale signs, open/closed signs, or other signs in your storefront, then make sure that you understand what is and isn’t allowed in the space. Also, take note of who is responsible for creating and paying for any standard storefront signage.
Learn more about store signage and how to make yours pop with our guide to storefront signs.
- Sublease Clause: Whenever possible, you want to have the ability to sublease your space. This clause offers some protection if you can no longer pay the rent or expand to the point where you need to move into a larger space. This can also provide you with flexibility to host pop-ups, pop-ins, or store-within-a-store tenants in your space.
- Co-tenancy Clause: If your business depends on the foot traffic that another nearby business brings into an area, then you should consider adding a co-tenancy clause, which allows you to break your lease if the anchor tenant leaves. This is especially important in shopping centers and malls that have one or two very big stores that are responsible for a large portion of the mall’s customers.
Step 6: Negotiate Your Lease
Once you have read through your lease, you can go back to the selling agent and try to negotiate for a better price or terms. The following are some of the most common terms you will negotiate in a commercial lease:
Did you know?
The value of the commercial retail leasing market was down by 42% in 2021 compared to 2020, making it a buyer’s market in retail spaces.
You can try to bring this down, especially if you’re looking at renting the space long-term. However, if you’re looking to stay for fewer than three years, you should focus your negotiating efforts on other areas.
Rent Hikes After Renewal
Landlords will generally try to work into the lease an annual increase in rent based on the consumer price index or some other measure. These are also called escalations, and tenants should reach an understanding before entering into any lease.
Utilities also take a chunk out of your profits, so try to see if this is something the landlord can include in the base rate. While they might not agree to include all, try to negotiate some items such as water and sewage.
Lease terms vary from state to state but are often one to five years in duration. Long-term lease terms can be daunting, especially if you are just starting out. The majority of lease agreements require a tenant to pay the rent whether their business survives or not, so it can help to be conservative and negotiate your lease duration. Do note that a shorter lease duration increases the lease base rate unless you have arranged a unique situation, like a pop-up shop or temporary space.
Emergency or Escape Clauses
Unfortunate events happen, so try to see if you can include a clause that will allow you to get out of the lease prematurely under unexpected circumstances. Think about damages within the space vicinity, loss of sales and bankruptcy, or environmental contamination.
Down Payment and Security Deposit
Many commercial leases ask tenants to pay up to three months’ rent upfront. Try to negotiate this for one or two months to conserve cash flow.
The best thing to do when looking for retail space for lease is to give yourself some time to weigh and consider the options to avoid making hasty decisions. After all, your retail space is the truest representation of your business. While it takes a lot of planning, we hope that this step-by-step guide gave you a good idea on how to get started and, ultimately, close a great and cost-efficient deal with a professional agent.