What Is The Importance of Tenant Mix?

The following story is related by one of our real estate investment instructors:  I first heard about tenant mix when I set up two real estate offices, one in Kailua and one in Honolulu. I hired a broker to be the branch manager of that location. That broker taught me much about commercial business over the next six months. The first thing he taught me was retail and he started with shoe stores. He told me that the best place for a shoe store was next door to another shoe store.

That didn’t make any sense to me—to have competing stores next door to each other. However, when I began really looking at our retail areas, I saw that it was true. Shoe stores tended to flock together. Other types of businesses did, too. Some of that was regional, some was related to our own particular marketplace, but some businesses seemed constant, one of which was shoe stores.

Another business that abides by this precept is restaurants, since most cities have one or more of what’s come to be called a “restaurant row”. When you go out to eat, sometimes you decide on a special place before you leave. Much of the time though, you will leave the house without having decided on a place to go and just go to the same area every time, your favorite restaurant row.

So, just like shoe stores, restaurants tend to cluster together. I’ll never forget when I was teaching realtors how to market retail properties. I was instructing a class in Atlanta, Georgia, which I did many times over seven or eight years, two or three times a year.   After a while, we figured out that we could get some input from the retail community.

One of the things we did was to ask McDonald’s real estate manager for the Southeastern United States to come visit our class. He explained how McDonald’s went through the process of selecting sites in the cities in the Southeast. He would show up with 2 or 3 assistants, people who were actually going out in the field and looking for sites. He had seven site selectors in his office, and they’d bring another couple of store managers and each of those store managers had a couple of people with them. So, they had this entourage of people showing up in our class carrying big muffins and coffee that we had during our break. The vice president of real estate would stand up and give us an hour of lecture with slides on demographics of how they picked the traffic counts, and all the rest of it. My students loved learning this scientific way to select a site.

Then one day, I had the idea that I should probably invite the Burger King guy, too. He was also in Atlanta, and he covered exactly the same territories—the same seven states. Burger King accepted the invitation, and their organization came down for the special purpose of giving their side of the story, knowing full well that the McDonald’s guy was doing the class, too. So, I had McDonald’s guy come on Tuesday, while Burger King came on Wednesday.

The Burger King guy shows up with no helpers, but with two huge bags of sausage biscuits—we had to fend for ourselves to get coffee. He came by himself, because he had no assistants or site selectors working for him. He covered his seven states all by himself. He selected every site, wrote every contract, and did all the research himself. He had no big research facility and he didn’t pay much attention to demographics. Although his talk took about 45 minutes, it boiled down to this, “I go in to Greenville, South Carolina, and look around for McDonalds. Then, I’d buy whatever is closest to them.” That was 15 years ago, but that is still their strategy today. They go and look for McDonald’s.

So, to recap that lesson: if you are filling up a little strip center, tenant mix is an important thing.

However, you still should shop for an anchor tenant businessfirst.For example, let’s suppose you have a little six-unit strip center. If it’s empty, one of your first concerns is to determine what business is going to anchor the center. There’s a special word for that in retail real estate—a strip center’s anchor is called the end-cap. Now, there are two ends to this building. That’s why it’s so important to pick the business at the end of the strip that will bring the most traffic into the strip and then build your tenant mix.

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