The Importance of Anchor Tenants in Commercial Real Estate Investments

While the exact tenant mix can vary between properties, most shopping centers follow a similar pattern. There’s a group of smaller tenants occupying spaces between 1,000 – 5,000 square feet (SF), and one or more established businesses acting as the anchor tenant(s). This article dives into the world of anchor tenants, explaining their role and impact on commercial real estate (CRE) investments.

Defining the Anchor Tenant

An anchor tenant is a lessee who rents the majority of the available space in a shopping center. These are typically large, well-known companies who view the location as strategically important and commit to long-term leases.

Identifying an Anchor Tenant: A Rent Roll Example

Let’s use a sample rent roll to illustrate the concept of an anchor tenant:

SUITE #	TENANT NAME	GLA (SF)	% GLA
1	THIRD FEDERAL SAVINGS & LOAN	5,451	3.96%
2	GOODWILL	17,215	12.52%
5	THE JOINT	1,056	0.77%
8	O’RIELLY’S PUB	2,200	1.60%
9	IN CARE HEALTH SOLUTIONS	4,930	3.58%
10	INNOVATIVE SMILES	3,076	2.24%
11	AVAILABLE	4,421	3.21%
12	PETPEOPLE	4,300	3.13%
13	BIBIBOP ASIAN GRILL	2,663	1.94%
14	DOLLAR TREE	10,000	7.27%
19	THE UPS STORE	2,293	1.67%
20	GEOGIO’S OVEN FRESH PIZZA	1,320	0.96%
22	EB NAILS	953	0.69%
23	FIRST WATCH	3,500	2.54%
25	CVS PHARMACY	12,106	8.80%
27	PREMIER SMILES ORTHODONTICS	7,300	5.31%
28	LITTLE BELLIES SPA	865	0.63%
29	AVAILABLE	1,282	0.93%
30	AVAILABLE	1,592	1.16%
33	T-MOBILE	2,920	2.12%
35	WHOLE FOODS MARKET	45,282	32.92%
36	BOSTON MARKET	2,808	2.04%
	TOTAL:	137,533	100.00%

From this rent roll, we can see that Whole Foods Market leases 45,282 SF, constituting 32.92% of the total space. This makes them the clear anchor tenant in this shopping center. Secondary anchor tenants, in this case, could be Goodwill, CVS, and Dollar Tree, collectively leasing over 60% of the total square footage.

The Different Types of Anchor Tenants

There are three main types of anchor tenants:

1. Grocery Store Anchors: These include familiar names like Whole Foods, Publix, Safeway, and Trader Joe’s.
2. Retail Anchors: Found in shopping malls, these are large department stores like Nordstrom, Macy’s, or Bloomingdale’s.
3. Evolving Anchors: In recent years, successful centers have seen interest from big-box DIY stores and department stores moving out of traditional malls, capitalizing on vacant Sears locations.

Why Anchor Tenants Matter in CRE Investing

Anchor tenants are crucial for the success of a CRE investment from both a retail and investment perspective. Here’s why:

1. Stability: Anchor tenants provide stability through long-term leases that contribute significantly to a property’s rental income.
2. Traffic Generation: Well-known anchor tenants draw customers into the center, potentially boosting sales for smaller businesses. Imagine the foot traffic a grocery store like Whole Foods attracts, potentially benefiting surrounding stores like pizza shops or phone retailers.
3. Credibility: A reputable anchor tenant enhances a property’s credibility, making it more attractive to potential investors and lenders who are more comfortable partnering with a space endorsed by a national brand.
4. Occupancy: While an anchor tenant fills a significant amount of space, their departure can drastically impact occupancy rates. In the previous example, if Whole Foods left, the vacancy rate would jump by over 30%.

The Impact of Anchor Tenants on Other Businesses

A strong anchor tenant can significantly influence other businesses in the center:

1. Traffic and Tenant Attraction: Anchor tenants are magnets for customers, which benefits surrounding businesses. Additionally, a good anchor tenant can entice new tenants to vacant spaces. For instance, a smoothie shop might find a location near a Whole Foods store highly desirable.
2. Co-Tenancy Clauses: Retail lease agreements often include co-tenancy clauses acknowledging the importance of anchor tenants. If an anchor tenant leaves, the clause grants the landlord time to find a replacement before offering rent relief to remaining tenants. This highlights how much smaller businesses rely on anchor tenants to generate foot traffic.

Understanding the role of anchor tenants, their lease terms, rent contributions, and overall business health is essential for CRE investments. After all, as the name suggests, the success of a retail property is often “anchored” to the presence of these key tenants.

The Current Landscape of Shopping Centers with Anchor Tenants

Recent years have seen a shift in shopping patterns, with some retail centers drawing customers away from traditional malls. Grocery stores, value-based retailers (like dollar stores and discount shops), and those specializing in “treasure hunt” experiences (think stores with ever-changing merchandise displays) are thriving. Additionally, do-it-yourself (DIY) stores and auto parts retailers have gained popularity.

Investors are increasingly interested in shopping centers anchored by these tenants. Often national chains selling essential products, they are major players in their respective markets. The customer traffic they generate benefits other tenants and contributes to the overall stability of the center, translating into potentially profitable, secure, and long-term investments.

Emerging Anchor Tenant Trends in CRE

The dynamic nature of the real estate market is evident in evolving anchor tenant trends. Here are three key areas for potential investors to consider:

1. Multi-Channel Fulfillment: The rise of online shopping is changing how anchor tenants utilize their space. We’re seeing a decrease in sales floor square footage in favor of more storage and fulfillment areas. This allows retailers to cater to in-person shoppers, offer buy-online/pickup-in-store options, and fulfill online orders efficiently. This trend is particularly relevant for big-box stores and large space occupants.
2. Open Spaces: Some creative developers are replacing traditional anchor tenant space with public, open areas featuring fountains, gardens, and other free attractions. While seemingly counterintuitive, the goal is to encourage customers to linger and explore the center, increasing the likelihood of unplanned purchases.
3. Experiential Components: Retailers are revamping stores to include more experiential features, enticing customers away from online shopping. For example, a sporting goods store like Nike might incorporate a basketball court within their store, allowing customers to try out products. Companies with experiential components, like boutique gyms, nail salons, and quick-service restaurants, can be particularly appealing due to their lower susceptibility to e-commerce disruption.

CRE Private Equity and Anchor Tenants

Leasing space to anchor tenants offers significant advantages for CRE owners. However, it’s important to remember that anchor tenants are typically drawn to prime locations and high-quality shopping centers. Acquiring such properties requires significant capital, and ongoing management can be complex.

Individual investors or small partnerships may lack the necessary resources to purchase and effectively manage these assets. While hiring a property management firm is an option, it comes with added costs that can erode an investor’s cash flow.

Many CRE investors interested in shopping centers choose to invest through private equity firms specializing in this asset class. These firms possess the capital to acquire top-tier properties, source lucrative deals, and manage them effectively post-acquisition.

Conclusion

Anchor tenants play a critical role in the success of commercial real estate investments. They generate stability, attract customers, enhance credibility, and influence the overall health of a retail center. As the retail landscape continues to evolve, so do anchor tenant strategies. Investors who understand these trends and partner with experienced private equity firms are well-positioned to capitalize on the potential of CRE investments anchored by strong tenants.