Real Estate Occupancy Costs

CFOs should be prepared for increases in rents and common area maintenance costs

By Al Urbanski

Occupancy costs are the keystone metric used by retailers to determine the financial health of their store spaces in given markets and locations. They are calculated by taking the base rent, adding the triple net costs a tenant pays and then dividing that number by the reported sales for the same period.

The corresponding value tells what percentage of the tenant’s sales are eaten up by the cost of occupancy. It’s standardized and can be compared over time across different geographic locations and against other retailers in the same category.

The new year started with reports that retailers’ real estate occupancy costs had gone down across the board. But an industry-wide average of occupancy cost bears little significance to individual players in retail whose locations, store sizes, and price points vary greatly.

“At a very good mall with an average sales per square foot of $600, occupancy costs of up to 16 or 17 percent are acceptable for tenants because they’re still making money,” said Mark Hunter, managing director of asset services at CBRE. ”But tenants in B or C malls have to have occupancy costs in the 10-to-12-percent range to stay in business there.”

An occupancy cost of 10% would be a balance sheet breakthrough for specialty restaurants whose accepted percentages are in the teens. For fastfood chains that aim for single-digit occupancy costs, locations with 10% calculations might be marked for closure. (See table.)

Datex Property Solutions, a provider of data-driven insights to landlords that compiles monthly changes in occupancy costs, noted wide variations in percentages and variations of occupancy costs across all retail segments.

In November 2022, Datex’s Tenant

The Up and Down World of Occupancy Costs

Variance is determined by comparing YOY percentages and dollars to determine velocity of change.

Track charted small decreases in yearover-year occupancy costs registered by fitness and movie theater chains, yet their percentages remained the highest in the industry, both above 20%.

Occupancy costs rose precipitously for department stores (2.89% to 7.92%), pet supply chains (6.97% to 12.33%), and craft stores (8.24% to 12.33%). Supermarkets saw theirs rise by more than a third, although they still remain in the low range of retail at 3.68%.

‘Supermarkets were clear category winners of the pandemic, but full-year 2022 is very much in line with prior years,” said Datex CEO Mark Sigal. “Pet supply retailers, too, were big winners on a trend that accelerated in 2022. But rents are higher these days, hence, higher occupancy costs.”

Players in the same categories can post occupancy costs that vary widely. In November, fast food providers’ costs declined to 6% while specialty restaurant operators saw their burdens rise to 17%.

“A restaurant like Chuck E. Cheese that’s known for entertainment and close engagement of customers has struggled coming out of the pandemic,” said Sigal. “Fast food restaurants with pick-up windows thrived.”

Rising Costs: CBRE’s Hunter warns retail CFOs to be prepared for increases in rents and common area maintenance costs in the coming year.

He has charted 5%-to-7% increases to pay janitorial, security, and landscaping services. Rents, too, will continue to increase in growing markets.

“There’s no new development out there,” Hunter said. “Retailers need the space and digitally native brands are going to compete for a lot of it. Supply is limited, demand is growing, and rents are going to go up. It’s the perfect situation for landlords.”

Gaylord Texan Resort & Convention Center Grapevine, TX

Produced By

See why your peers are joining us at the 59th annual SPECS Show:

I’m looking forward to networking and attending SPECS’ educational sessions to expand my knowledge, allow me to learn and improve professionally. I’m excited to share the latest trends with my teams and apply them to new business opportunities.

TINIKA DAVIS Energy/Special Projects Manager

SPECS has become my go-to event of the year for industry connections and emerging building innovation and technology. It allows me to keep up-to-date with new product releases, vendors and partners in a fun and informative atmosphere designed for successful professional interactions.

This March, SPECS will be a one-of-a-kind show that will bring fascinating topics that touch a retailer’s daily life. Experts will speak about issues such as real estate in an ever-changing landscape, current labor trends, maintaining equipment with supply chain delays and shortages, and more. You won’t want to miss listening to industry leaders and catching up with friends and colleagues!

SARA IVERSON SMITH Director of Real Estate, Facilities, and Construction