In-Depth: Street Retail Wanting Classification

Nowadays, a great variety of retail properties remain unclassified. Retail facilities operating outside shopping centers are automatically rated as street retail, the category that includes small detached retail outlets, pavilions, built-in shops or annexes on the sides of apartment blocks and office buildings.

Market operators build their business concepts on the basis of consumer preferences and specifics of their operations i.e. proceeding from their own ideas as regards the standards and requirements their outlets are to meet. The concept usually includes, among other things, engineering requirements a suitable property has to meet. Retailers evaluate location, engineering and technical criteria, costs, etc.

To most retail operators an ideal property is a one-storied building with direct access from the street (the so-called first line houses) in a retail corridor, of a rectangular shape, with bay spacing of at least 6 meters, large storefront, ceiling height of at least 3 meters, a 7-space car park on the sides of the building and two separate entrances. The ideal property must be prepared for interior fine finish, have hot and cold water supply, two sewer outlets, central heating and a sanctioned power capacity of no less than 80 kilowatts.

Unfortunately, many properties fall short of the ideal. Therefore, operators are forced to spend time and money on bringing them in line with accepted standards. Nowadays, companies looking for properties have to ask plenty of questions concerning technical and legal characteristics. So far, the street retail sector still has not developed any classification. By way of comparison, to secure detailed data on a certain warehouse facility all the client needs to inquire about is the class of the building.

In our opinion, there has been a long-felt need for street retail classification. That will help retail operators to look at their properties from a qualitatively new angle and effect the quality of the entire street retail sector just as was the case in the office sector after office classification had been adopted.

As soon as the criteria for office classification were introduced many builders and developers gained a better understanding of what should be raised on a certain site, which engineering systems must be put in, what else is necessary to make sure that the project meets the requirements necessary to belong to a certain class. With time, classification standards for warehouse facilities, too, were developed, though not without controversy.

A better understanding of correlation between the value of their property and its class will help landlords plan investment and financial flows more effectively. Buyers and tenants will be able to state their requirements clearer. They will be able to say what kind of property exactly they are looking for and how much has to be invested in upgrading the facility. Street retail classification may also help by pre-sale or pre-lease appraisal of properties. Quite often landlords fail to evaluate their properties correctly, placing an emphasis on location without taking into account the size of investment a would-be tenant will have to make.

Of course, location plays an important role in retail but there are also such factors as profitability, the cost of rent and investment in inseparable improvements. Once their maximum levels are exceeded the operator may abandon the project even if its location fully suits him.

Properties that fully meet all requirements are rated as class A. Where a property meets more requirements than set for class B space but less than set for class A, by 1 or 2 parameters, it is rated as class A-. Where a property meets more requirements than set for class B, by 1 or 2 parameters, it may be rated as class B+. Similar rules are applicable to class B- and C+ properties. Facilities that fail to meet class C requirements fall into the class D category of buildings requiring considerable alterations.

Such a classification shows the level of investment comfort of the property and its compliance to the needs of the buyer or tenant. Investment comfort lies in effectiveness of investing in real estate with a view to make profit. For example, when opening a store on the premises of a class A building the retailer will spend considerably less on the project than he would have to spend on a class C property. Fit-out and construction works will require less time and effort, enabling the retailer to launch operations and secure returns sooner.

Class A facilities are more comfortable also because the majority of retailers will be able to carry out operations on their premises, investing comparatively smaller amounts of cash and man-hours in their development. Class B properties are less comfortable as fit-out works sometimes require alterations to engineering systems. A restaurant owner looking for a class B property will plan an increase in energy capacity or plan additional work to build technical sewer outlet, changes to ventilation system, etc. Class C properties may require considerable spending. The investor must be ready to splash out on construction or redevelopment works, obtaining permission for changes to load-bearing structures, ventilation system etc. In other words, the investment comfort level will be low. Class D properties are situated mostly on basement floors and offer minimum level of investment comfort.

Of course, the proposed classification is subject to discussion. Companies operating on commercial property market may develop classification criteria on the basis of their experience or submit changes to the proposed classification.

We offer the following classification for street retail properties:

Class A

- location in main retail corridor

- direct access from the street

- maximum 2 levels

- each floor regular shaped

- open plan

- bay spacing min. 6 meters

- storefront height min. 2.5 meters

- minimum ceiling height 3.5 meters

- parking facility at the side, no less than 7 spaces

- two and over entrances

- office building or detached building

- legal title to operation and maintenance of the building

- fine finish

- minimum power capacity 0.3 kilowatts

- hot and cold water supply

- two sewer outlets

- central heating

- combined extract and input ventilation, with minimum air renewal rate of 7.5, air conditioning

- state-of-the-art fire safety system

Class B

- proximity to main retail corridor

- direct access from the street

- max. two levels

- few load-bearing walls within perimeter

- min. ceiling height 3 meters

- min. storefront height 1.5 meters

- parking area

- two separate entrances

- office building or annex of a residential or office building

- may require redecoration

- min. power capacity 0.2 kilowatt per 1sqm

- hot, cold water supply

- sewage disposal

- central heating

- combined extract and input ventilation, air conditioning

Class C

- large number of load-bearing walls within the building’s perimeter

- min. ceiling height 2.8 meters

- wide windows, min. height 1 meter

- available area for parking

- two separate entrances

- office building or annex on the side of an apartment house or an office building

- may require capital repairs

- min. power capacity 0.1 kilowatts

- water supply

- sewage disposal

- central heating

Class D

- large number of load-bearing structures

- min. ceiling height 2.7 meters

- min. power capacity 0.1 kilowatts per 1sqm

- small windows, less than 1 meter high or no windows

- one entrance

This piece was contributed to Vedomosti by Marat Manasyan, managing partner at the investment and consulting company MovEstate. The point of view of the author does not necessarily reflect the position of the editors.