I'm relatively new to looking at shopping centers and have learned the importance of occupancy costs when underwriting.
Does anyone have any rule of thumb they can share when it comes to occupancy costs between different merchandisers? I know that with different margins for different businesses some retailers can handle a higher occupancy cost than others, so curious if there's industry standards when looking at a jewelry store vs. restaurant, etc. I searched the interwebs for a "bible" of occupancy costs but came up empty handed.
Thanks!
You are correct it is going to scale with the retailer and the type of retail it is. The best way to look at specific tenants is to look at OMs with them in other comparable deals.
On type of retail, your going to have to think about your center in particular, some places (5th ave, Rodeo Dr, ect.) people have Occ cost at 250-500% because their store is really a marketing store front. Tai Kwando joints with rent control in great locations that might have a 15% occ cost and make no money because they have never had a rent bump and signed some street retail 25 years ago.
In your situation I would look at the newest leases or the leases this property is being marketed on and their occ cost, and think if it is a stable tenant that you want to keep how sales going up or down for 5-10 years as renewals increase their rent will affect their ability to stay. If it is a center you want to reposition, I would look at who has the highest Occ. cost and maybe you can get out of there, and then what type of tenant you want to replace them with and if they would be able to maintain a store at higher rents.
Certain retailers have crazy occ cost due to how they lease space and their sales. Apple and Tesla are two I can think of off the top of my head that I don't think I have ever seen over a 10% occ cost ever and typically it is like sub 4%.
I think to really analyze a center you need to look at all the tenants who have a healthy occ cost, and then look at who has a seemingly high/low occ cost, are they a good fit for the center? Maybe they are the first tenant you replace to start bringing that center to stabilization. Maybe they don't care that they are losing money on rent. Maybe they are the only ones who belong in the center?
Tl;dr - There is no bible not even close.
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