MARKET KNOW-HOW: Anchors, the Locomotives of Trade

All Tenants Are Equal

Ilya Shershnev, development director of Swiss Realty Group (Moscow), considers it unreasonable to try and attract anchor tenants in business centers. “If a business center offers tenants equal premises of 800 or 1,000sqm and one company rents several floors, it does not become an anchor tenant. It is simply the largest tenant in the building,” he says. “Any landlord is interested in leasing space to well-known companies with a good business reputation. But, at any rate, the term ‘anchor tenant’ is inapplicable to the business-center.

“Commonly, tenants renting office space are not interested in the flow of people and other ‘advantages’ like neighborhood offers, if such a neighborhood always has more spaces in the parking area, the best floor and other privileges.”

However, Nikolai Smirnov, head of the office space department with Vesco Realty, believes that other tenants, nonetheless, are willing to pay more for office space, when sharing with, say, British Petroleum or Microsoft, from considerations of prestige and the guarantees of a high level of servicing and maintenance in the building. According to Smirnov, approximately half of the class A business centers and 10-20 percent of class B business center developers claim the presence of an anchor tenant; class C ‘anchor tenants’ are rare.

Development companies are interested in attracting major tenants at early stages of construction, whose presence brings about an increase in the lease rates for the remaining premises.

Key tenants enter into lease agreements long before the construction is completed which is why the sums they bring to the developer in the form of deposits and pre-payments are often a good source of additional financing at the final stages of the project.

At times, office buildings are raised for a specific tenant, for instance, Mercedes-Plaza on Leningradskoye Shosse, which means the financing of construction may be at the expense of the future tenant.

“For the tenant, too, becoming an anchor is advantageous,” says Smirnov. “That ensures special treatment on the part of the landlord, considerable discounts can be negotiated, ‘lease vacation’, a decrease in the deposit.”

The main disadvantage of attracting anchors to business centers, notes Smirnov, is the risk of losing those tenants afterwards. If that happens, the owner of the building will have problems filling the premises and may even incur financial losses for a while.

2,000 square meters lying vacant for a quarter may result in losses of up to $500,000. However, that disadvantage is relative: the system of deposits ensures absolute security to the landlord, provided the lease agreement is drafted and signed correctly, believes Smirnov.

And still, says Anna Shiryayeva, director general of the real estate consulting company Magazin Magazinov, a business center needs no anchors, since its operation does not depend on the daily inflow of customers, while the rental charge depends on the quality of premises and the market situation at the moment the agreement is signed. Anchors are a phenomenon more typical of the retail sector.

Do You Want to Be an Anchor?

Attracting anchors in retail-amusement centers or business centers is standard and fairly easy, says Nikolai Smirnov. The procedure involves presenting the future premises to a target group of companies, selected in advance, and a dialogue with them in the B2B (business-to-business) format.

As regards business centers, a professional realtor knows in advance the relocation requirements or expansions in well-known companies operating in Moscow or contemplating entering that market. Interaction with those firms guarantees the desired result in the sphere of newly erected class A business centers.

“As for retail-amusement centers, it is also quite easy to predict which company will show an interest in becoming an anchor tenant. If, for instance, [domestic appliances retailer] Tekhnosila is not ready to take up a large volume [of space], [its rival] M.Video will surely be interested; if not Sedmoi Kontinent [supermarket chain], then Pyatyorochka or Paterson will surely be seriously interested in ‘anchoring’ the new shopping center,” says Smirnov.

“Attracting an anchor tenant is a strategic move not only for the shopping center, but also for the company that rents space, since large-scale investment in the new retail outlet may prove considerable for any retail chain and amount to 10-20 percent of the [projected] retail space,” says Ilya Shershnev. “An alternative to direct sale is to invite an anchor as a co-investor of the project as early as the design and development stage of the concept.”

The growing number of retail chains – including well-known international operators such as IKEA, Auchan, Ramstor, Metro, as well as the Russian chains Sedmoi Kontinent, Perekryostok, and Pyatyorochka – operating in various markets, each of which rents more and more space in trading centers, has brought about the emergence of hyper- and mega-markets in Russia.

“Development of regional and super-regional shopping centers will fuel the fight for anchor tenants, because their successful operation is impossible without the correct concept of accommodating tenants, including the presence of large anchors,” says Jeff Kershaw, director of the department for retail space at Noble Gibbons in association with CB Richard Ellis.

“An anchor tenant is not merely a large shop, located at the center of the shopping complex; it is an anchor capable of attracting a certain type of customer to the center,” Kershaw explains.

Each potential anchor tenant puts forward a set of requirements a shopping center should meet for the former to consider the possibility of renting space there, experts from Swiss Realty Group note.

The main – and the strictest – criterion on that list is the rental rate, followed by the location of the project, its concept, architectural design, the development company and the management company in charge of the project and their reputation.

Generally, anchor tenants pay a lot of attention to their target groups, the layout of the premises, special provisions in the lease agreements and the issues of expansion and/or plans to enter the market.

That is why, says Kershaw, it is so important for marketing and leasing experts to have experience in working with anchor tenants, of which there is an acute shortage on the market.

Anna Shiryayeva firmly believes that the fundamental principles of attracting anchors to shopping centers elsewhere differ greatly from how it is done in Russia.

Experts at Colliers International, too, note that today both the development company and the retailer seek to enter into a lease agreement at the earliest stages of the project. And this concerns not only the anchor tenants, who are highly interested in joining the project as early as possible, but also the usual rank-and-file lessees in shopping arcades.

“Up to 90 percent of the premises may be leased out as early as two months before the official opening date of the shopping center, as long as all the interested parties assume a rational approach to business,” says Natalya Sazonova, an analyst with Colliers International. “A shopping center where most shops operate normally from the very beginning looks professional and is the result of accurately coordinated work by the development company, the broker and the tenant.”

Natalia Oreshina, a co-director of Stiles & Riabokobylko, says that the market still feels the shortage of high-quality retail centers, although investments have been pouring in to commercial real estate projects since 2000.

For the most part, those are projects with a short – 4 to 5 years – payback period of no particular interest: construction is not very expensive; the premises are filled so as to satisfy the needs of the neighborhood, with the obligatory Jack-Pot arcade gallery as an indispensable condition.

Oreshina singles out the Okhotny Ryad plaza in Manezh Square, Atrium near the Kursky train station and the Mega shopping mall as the most profitable of all retail centers of the second generation, although, in her opinion, only Mega and Atrium meet the requirements that are crucial for a retail center to prosper fully.

Oreshina believes that the next stage of development on the market will see the emergence of multifunctional complicated projects offering a qualitatively new level of shopping. “Upon entering such a center, you find yourself in a place that is thought-out to the minutest detail. And you feel good, just being there,” she says.

Preferential Terms for Anchors

In terms of rental rates, Moscow is one of the most expensive cities in the world, with one square meter leased at $400 to $3,000 (excl. VAT and operational cost) outside the city center and at $800 to $3,700 inside the Garden Ring.

Anchor tenants occupying 12,000 to 24,000sqm in hypermarkets pay an average rent of $150 per square meter per year, or even less. This is connected with the specifics in the operations of anchor tenants, who require vast premises, with the turnover from one square meter being quite low.

Rental charges for anchor tenants may be 10 or even 20 times lower, holds Colliers International’s Natalya Sazonova, according to Swiss Realty Group’s evaluations, than, say, for a Swatch watch store located in the center of the mall opposite the main entrance.

Other terms which are “not even discussed” with smaller tenants may be considerably relaxed for anchors.

For instance, operation costs for anchors are usually lower or fixed, because an anchor tenant is less dependent on the general access areas of the shopping center (such as areas for customers), having considerable space and a large variety of services on its own premises, says Kershaw.

A lease agreement with an anchor tenant is usually signed at the earliest stages of the project when the construction site is not even fenced off and usually covers a longer period of time than is the case with ordinary lessees.

Besides, according to Natalya Sazonova, anchor tenants agree more often than other lessees to pay their rent in the form of a percentage of their turnover.

“Such schemes help the landlord and the tenants to avoid conflicts during the term of lease. Both parties are equally interested in attracting additional inflows of customers in the shopping center,” says Sazonova.

According to Anna Shiryayeva, the minimum rate large supermarket chains in the US are charged is 1.5 to 2 percent of the turnover. In Russia it ranges from 3-4 percent up to 6-7 percent for super- and hypermarkets.

Experts forecast that as soon as the supply of retail premises meeting international standards begins to grow, rental charges will drop in shopping centers with worse locations and layouts.

But, in the opinion of Natalia Oreshina, rental rates for anchor tenants are unlikely to drop noticeably.

Competition between anchor tenants vying for the best premises in the best shopping centers, which are still lacking on the market, creates a system of checks and balances, which restrains anchor tenants from demanding extremely beneficial terms, claims Jeff Kershaw.

“Anchor tenants, as well as many other chains, to which that term [anchors]is not applicable, given the smaller areas their shops occupy, but which, nonetheless, actively develop their business, may stipulate special terms of lease, which will automatically exclude the possibility of leasing space to direct rivals [in the same shopping center],” says Ilya Shershnev.

“From the standpoint of antitrust legislation such demands are questionable, as by law the landlord is free to lease premises to other companies. However, traditionally landlords accept the rules of the game and keep their word. Legally that may be laid down as the tenant’s right to rescind the contract without penalty if that condition is violated.”

Although it is unreasonable to have two hypermarkets and two multiplex theatres operating in one place, it is quite acceptable, says Anna Shiryayeva, to have two department stores operating in one shopping center and it is not always expedient to insist on the expulsion of rivals.