Leasing retail space is often one of the biggest operating expenses for a small business. It takes careful planning, consideration, and budgeting to find a place that meets your needs and doesn’t take too much of your budget.
Below, we’ll walk you through six steps on how to lease a retail space for your store:
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 place. Remember to find a figure you’re comfortable with because it will take a significant portion of your monthly budget.
The maximum percentage a business should allocate to its lease payment differs depending on the industry. The range is typically 3%–10% of monthly gross sales. Ideally, you should spend no more than 10% of your monthly gross sales on your lease payment.
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 similar size 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 guide 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.
- Property taxes: This cost makes up a large percentage of the expenses when leasing a space and could vary per state.
- 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 insurance.
- Common area maintenance: This cost varies depending on the property’s maintenance needs. Factor in services like security, landscaping, and cleaning, among others, shared space maintenance.
- Utilities: Estimate costs for electricity, water, heat, sewer, internet, and other utilities you’ll need. For reference, in 2020, retailers spent an average 10.66 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.
Pro Tip: 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.
Generally speaking, temporary retail activations tend to be more budget-friendly than opening a permanent brick-and-mortar shop. Pop-up shop costs are expected to be significantly lower throughout 2021. However, in 2021, many businesses should be able to negotiate a competitive lease; commercial rent prices are more than 11% lower than they were in 2019.
If you work with a broker, remember to factor in their fee. Commercial real estate brokers who lease retail space generally charge from 7%–10% of the total lease costs. For example, if you sign a three-year lease at $50,000 a year ($150,000 total), and your broker charges 10%, the broker’s fee would be $15,000.
Fees may also be on a per square foot basis, generally $1–$5 depending on the length of the lease. For instance, let’s say you lease a 5,000-square-foot building with a three-year lease term, our broker fee would be around $15,000 (5,000 sq. ft. x $3).
Step 2: Decide What You Need From a Space
When you lease retail space, you 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. Space needs vary for each business, but here are some common areas for which you may need space:
- Sales floor
- Dressing rooms
- Additional storage space
- Checkout counter
Come up with a general calculation of how much space you need, within 250 or so square feet, and you will narrow your property down significantly.
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
Check out our article on planning your retail store layout for additional information on how to set up your space.
Step 3: Find Four or Five Quality Retail Space Options
Now that you have your budget and space requirements figured out, it is time to locate four to five quality options for renting retail space. You don’t want to limit yourself to one right from the beginning. Instead, find four or five choices that could work and then compare them to one another to determine the best fit. Multiple options also gives you more leverage when you negotiate costs later.
Here are the best ways to locate property:
There is no substitute for local knowledge. You can hire a local broker to take advantage of their in-depth knowledge of the area. They’ll know the population and demographics of the area and where the best retail traffic is. It’s even better if they have previous experience working with the landlord.
If you want to go the store-within-a-store approach, cruise around the local area yourself. Take note of not only which stores are complementary to your brand and products but also which stores have a steady and healthy volume of foot traffic.
You can head to Google and type in keywords about the type of space you’re looking for. There are also several sites dedicated to commercial real estate listings, such as 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 head to the National Association of Realtors (NAR) website to see its list of accredited agents. But, if you’re looking for a pop-up space, there are online directories for short-term and temporary retail rentals. Go—PopUp is just one example among many.
Property listing subscription services help you locate retail properties. The advantage of this is that it is much more than a location tool, offering in-depth analysis of local markets, demographics, and other pertinent information. However, it will also cost you around $300–$1,000 per month, depending on the package selected.
Step 4. Evaluate Each Potential Location
Now that you have a few good options, it is time to narrow them down. You should locate your business in:
- 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 lives will attract customers. You can use census.gov’s fact-finder tool to look up general demographics for an area or city. You can also try determining the foot traffic of a specific location.
- Near your competitors: Although it may seem counterintuitive, 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 your lease. This can be a complicated process, especially considering all the legal terminology and lease-speak. Working with a commercial real estate agent is helpful for determining what should and should not be part of the lease, and making sure you make the best decision for your business.
In evaluating your lease, do an extensive review of what you can or can’t do with the space you’re leasing. Below are some 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.
- 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..
- 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.
- 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.</lireak 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.
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. 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 the rest, such as 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: The tenant and landlord split expenses in this type of lease.
- Short-Term Lease: Commonly used for pop-up and temporary spaces, landlords may customize responsibilities based on the requirements of business renting the space.
Step 6: Negotiate Your Lease
Try negotiating the following items in your lease:
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, environmental contamination, etc.
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 is to give yourself some time to weigh and consider the options so that you’ll avoid making hasty decisions. After all, your retail space is the truest representation of your business. If you want to lease retail space for your business, you’ll need to do a lot of planning, but 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 broker.