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What are the key financial metrics to track when leasing a retail space?

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If you are a retailer looking for a new space to lease, you need to understand the financial metrics that will affect your profitability and cash flow. Leasing a retail space involves more than just paying rent; you also have to consider the terms, fees, taxes, and incentives that are part of the lease agreement. In this article, we will explain what are the key financial metrics to track when leasing a retail space and how they can impact your business performance.

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Harpreet Singh Chhabra

SPOC @ IOW PLC | SIDMBA, Marketing Strategy
Gabriella Stelluto

Director of Business Development @ Luxe Retail | Leasing Expert
Brent Morgan

Head of Property, Supply & Mail Services at Bupa Health Insurance

1 Rent per Square Foot

One of the most basic and important metrics to track when leasing a retail space is the rent per square foot (RPSF). This is the amount of rent you pay divided by the total area of the space you occupy. RPSF varies depending on the location, size, quality, and demand of the space. You can use RPSF to compare different spaces and negotiate with landlords. You want to find a space that offers a reasonable RPSF that matches your budget and revenue expectations.

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Gabriella Stelluto

Director of Business Development @ Luxe Retail | Leasing Expert
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It is important to note that the larger the tenancy is the less the rental is PSQF, so you need to take the size of your tenancy into account when doing a comparison. Also the location will determine the rent psqf, higher foot traffic means more demand and more rent. Please also note that there is extra levies like rates and taxes and marketing, so you would also need to add these costs in to work out your gross rent psqf.

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2 Occupancy Cost Ratio

Another key metric to track when leasing a retail space is the occupancy cost ratio (OCR). This is the percentage of your gross sales that goes to cover your rent and other occupancy expenses, such as utilities, maintenance, insurance, and taxes. OCR reflects how much of your revenue is eaten up by your fixed costs. You can use OCR to measure your profitability and efficiency. You want to keep your OCR as low as possible, ideally below 10%, to maximize your profit margin.

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Brent Morgan

Head of Property, Supply & Mail Services at Bupa Health Insurance
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It's important to ensure that both the rent and sales figures both exclude GST. Often rent excl. GST is compared to sales incl. GST by property owners and this artificially reduces the % and therefore appears more favourable to the tenant, (which it is not).

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Gabriella Stelluto

Director of Business Development @ Luxe Retail | Leasing Expert
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It’s unlikely that occupancy will be below 10% , normally there is two costs. An occupancy costs in retail leasing means your gross rent divided by your gross sales as a %. Landlords will look at this to see if your over performing and may charge hefty increases upon renewal if your occupancy cost is low.

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3 Lease Term and Options

The lease term and options are also critical metrics to track when leasing a retail space. The lease term is the duration of the lease agreement, usually expressed in years or months. The lease options are the rights and obligations that you and the landlord have regarding the renewal, extension, termination, or modification of the lease. The lease term and options affect your flexibility and stability as a tenant. You want to find a lease that offers a suitable term and options that align with your business goals and plans.

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Gabriella Stelluto

Director of Business Development @ Luxe Retail | Leasing Expert
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You can also look at adding break clauses in your lease to mitigate your risk, it would be in your interest to secure a longer term lease with a break clause

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4 Lease Incentives and Concessions

Lease incentives and concessions are the benefits and discounts that the landlord offers to you as a tenant to entice you to sign or renew the lease. Lease incentives and concessions can include free rent, tenant improvement allowance, rent abatement, early occupancy, and lease buyout. Lease incentives and concessions affect your cash flow and savings as a tenant. You want to negotiate for lease incentives and concessions that reduce your upfront and ongoing costs and improve your space quality and functionality.

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5 Lease Accounting and Reporting

The last key metric to track when leasing a retail space is the lease accounting and reporting. This is the process of recording and disclosing the financial impact of the lease on your balance sheet, income statement, and cash flow statement. Lease accounting and reporting is governed by the accounting standards and regulations that apply to your business. Lease accounting and reporting affect your financial performance and compliance as a tenant. You want to follow the lease accounting and reporting rules and best practices that accurately reflect your lease obligations and benefits.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Harpreet Singh Chhabra

SPOC @ IOW PLC | SIDMBA, Marketing Strategy
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A very strong thing to note for a centre to be successful and understand its future success is the Community integration and Revenue Per User visiting the centre. This creates a demand from brands to be present in the space pushing the PSF rental higher.

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What are the key financial metrics to track when leasing a retail space?

1

2

3

4

5

6

1 Rent per Square Foot

2 Occupancy Cost Ratio

3 Lease Term and Options

4 Lease Incentives and Concessions

5 Lease Accounting and Reporting

6 Here’s what else to consider

Commercial Leasing

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What are the key financial metrics to track when leasing a retail space?

1

2

3

4

5

6

1 Rent per Square Foot

2 Occupancy Cost Ratio

3 Lease Term and Options

4 Lease Incentives and Concessions

5 Lease Accounting and Reporting

6 Here’s what else to consider

Commercial Leasing

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