The tenant mix in a retail property refers to the combination of stores, restaurants, services, and other businesses located within the development. The tenant mix has significant implications for the success, value, and risks of a retail investment. Some key considerations include:

Customer appeal:

The types of tenants determine the main customer groups a retail property will attract. The optimal tenant mix appeals to the largest potential customer base for that location and the surrounding area. It provides enough variety and complements to keep customers on-site longer, while avoiding too much direct competition between stores. The more a mix matches customer needs, the higher sales and foot traffic it will generate.

Anchor tenants:

Large anchor stores like department stores or supermarkets attract customer traffic that benefits smaller retailers in the same development. However, over-reliance on a few anchor tenants poses risks if they downsize or relocate. An ideal tenant mix has strong, well-diversified anchors to drive steady traffic plus smaller tenants able to thrive independently if needed. Strong independent retailers also act as anchors.

Co-tenancy clauses:

Many retail leases have co-tenancy clauses allowing tenants to pay lower or no rent if occupancy rates in a development drop below a minimum threshold or certain key anchors leave. While this protects tenants, it risks reducing the property's NOI and cash flow for owners if anchors depart or vacancy rises. Landlords must consider co-tenancy clauses carefully based on the strength and diversity of anchors in the overall tenant mix.

Total occupancy costs:

The types of tenants, their rents and other obligations like utilities, maintenance, and property taxes significantly impact the profitability of a retail property. Service-oriented tenants often have higher occupancy costs than merchandise retailers. While higher costs mean greater income potential for owners if tenants are successful, they also pose risks should sales decline. An optimal tenant mix provides stable income from a base of tenants with affordable occupancy costs plus upside potential from more premium tenants.

Risk diversification:

A tenant mix dominated by similar types of businesses in the same industry sector carries greater risk exposure if that sector experiences a downturn. Mixing tenants across sectors, price points, and business models provides more stability by diversifying risks. For example, balancing necessity-driven tenants like supermarkets and drugstores with more discretionary boutiques and dining options. The most resilient properties house a diverse range of thriving independent shops, national chains, services, and leisure concepts.

Synergies between tenants:

An ideal tenant mix includes businesses that draw mutual benefit from co-location. For example, cafes and home decor stores, gyms, and sporting goods retailers, coworking spaces, and coffee shops. When tenants attract segments of each other's customer base, it enhances exposure for all while giving people more reasons to visit and stay longer. Seeking out natural yet underutilized synergies between tenants boosts property success.

Growth and scalability:

The types of tenants in a retail property determine its potential to grow rental income over time as demand increases in the area. Retailers with the ability to uptake more space as sales improve offer more scalability than static tenants locked into long-term leases. The optimal mix of anchor tenants, smaller shops, and eateries provides upside potential from retailers looking to expand into any additional space. A tenant roster unable to grow with the local market will limit a retail investment's income trajectory and total return.

A strategic tenant mix is essential for maximizing the value and resilience of a retail property. Beyond matching the location and customer base, diversity, anchors, scalability, occupancy costs, and tenant synergies all warrant careful consideration. With a balanced mix suited to market growth over the investment timeline, owners gain stability and boost their opportunities for increasing returns. But in fast-changing environments, adaptability is key.