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Retail Real Estate Guide

Anchored vs unanchored, co-tenancy clauses, and percent rent. Understanding the landlord-tenant balance in retail CRE.

Educational content only: This information does not constitute legal, tax, financial, or investment advice. Always consult qualified professionals before making investment decisions.

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Retail Real Estate in One Page

Retail CRE includes shopping centers, strip malls, single-tenant net-lease properties, and urban storefronts. The sector has been reshaped by e-commerce, but strong fundamentals remain for well-located, experience-driven retail.

Retail Property Types

  • Anchored centers: Grocery-anchored or big-box anchored (50k-500k+ SF)
  • Unanchored strip centers: Smaller tenants, service-oriented (10k-50k SF)
  • Single-tenant net lease: Credit tenant (CVS, Walgreens, Dollar General)
  • Power centers: Big-box retailers, home improvement, category killers
  • Lifestyle/urban retail: Mixed-use, experiential, dining-focused

E-commerce impact: Not all retail is dying. Grocery, services, fitness, dining, and experiential retail remain strong. Commodity goods (apparel, electronics) have migrated online.

Lease Structures and Key Clauses

Base Rent + CAM + Taxes + Insurance

Most retail leases are modified gross or NNN:

  • Base rent: Tenant pays fixed $/SF annually
  • CAM (common area maintenance): Pro-rata share of parking lot, landscaping, management
  • Taxes & insurance: Pro-rata share or direct pass-through

Percent Rent (Overage Rent)

Some leases include percent rent: tenant pays base rent plus a percentage of sales above a breakpoint.

Breakpoint = Base Rent / Natural Breakpoint %

Overage = (Sales - Breakpoint) × Overage %

Example: $50k base rent, 8% natural breakpoint = $625k sales breakpoint. If tenant does $1M in sales, overage = ($1M - $625k) × 8% = $30k additional rent.

Reality: Most tenants don't hit breakpoints. Don't underwrite meaningful percent rent unless you have proof of tenant sales.

Co-Tenancy Clauses (The Landlord's Risk)

Co-tenancy clauses allow a tenant to reduce rent or terminate if an anchor tenant leaves or occupancy falls below a threshold.

Example clause: "If the grocery anchor closes, tenant may reduce rent to 50% of base until anchor is replaced."

Watch for: Opening co-tenancy (tenant won't open unless anchor is operating) and ongoing co-tenancy (rent reduction or termination if anchor leaves).

Exclusive Use and Radius Restrictions

  • Exclusive use: Tenant gets exclusive right to sell certain goods (e.g., only pizza restaurant in the center)
  • Radius restriction: Tenant can't open another location within X miles

These clauses limit your ability to lease to competing tenants and can complicate future leasing.

Underwriting Retail Deals

Anchored vs Unanchored Centers

Anchored (Grocery/Big-Box)

Anchor drives traffic to smaller tenants. More stable but lower rents from anchor.

  • + Stable traffic and occupancy
  • + Easier financing
  • - Co-tenancy risk if anchor leaves
  • - Anchor pays below-market rent

Unanchored (Service Retail)

Service-based tenants (nail salons, dry cleaners, fitness, QSR). Higher rents, more rollover risk.

  • + Higher $/SF rents
  • + Less co-tenancy risk
  • - More tenant turnover
  • - Harder to finance

Location, Location, Location (for Real This Time)

Retail value is driven by traffic and visibility:

  • Traffic counts: Daily car count on adjacent roads (15k+ is strong for strip centers)
  • Visibility and access: Signage, ingress/egress, corner vs mid-block
  • Demographics: Household income, density, competition within 3-5 miles
  • Parking ratio: 4-5 spaces per 1,000 SF is typical; underparked = tenant and financing issues

Retail Underwriting Checklist

  • ✓ Review all leases for co-tenancy clauses
  • ✓ Confirm CAM reconciliation and true-ups
  • ✓ Verify tenant sales (if claiming percent rent)
  • ✓ Check exclusive use and radius restrictions
  • ✓ Model anchor departure scenario (if applicable)
  • ✓ Estimate re-tenanting costs and downtime
  • ✓ Assess parking ratio and site functionality

Use our investment calculator to stress-test occupancy and rent scenarios.

Due Diligence Checklist

Lease Review

  • All executed leases, amendments, and estoppels
  • Co-tenancy provisions and anchor obligations
  • Exclusive use clauses and radius restrictions
  • Percent rent provisions and historical sales data
  • Renewal options and rent escalations

Physical and Site

  • Roof and structure condition
  • Parking lot paving, striping, lighting
  • Signage condition and zoning compliance
  • ADA compliance (parking, ramps, restrooms)
  • HVAC systems (if landlord responsibility)

Market Analysis

  • Traffic counts and site visibility
  • Demographics (3-mile radius): income, population, households
  • Competing centers and vacancy rates
  • Retail lease comps ($/SF, TI, lease terms)

Common Mistakes to Avoid

Ignoring Co-Tenancy Risk

If half your tenants have co-tenancy clauses tied to the grocery anchor, the anchor leaving can cascade into a 50%+ occupancy loss.

Overestimating Percent Rent

Unless you have verified tenant sales data showing consistent overages, don't underwrite percent rent as meaningful income.

Underestimating E-Commerce Impact

Apparel, electronics, and commodity goods have migrated online. Focus on service-based, experiential, and necessity retail (grocery, fitness, dining).

Poor Location = Permanent Handicap

Low traffic counts, poor visibility, or inadequate parking can't be fixed. These are structural problems, not value-add opportunities.

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