Tuesday, 25 February 2014

The Flagship Tenant

Continuing the general theme of "The Death Of The Traditional High Street" and "Retail Mix Control", as well as the related topic of "how land ownership smashes The Invisible Hand to pieces", let us consider the issue of "The Flagship Tenant".

NB, this is not to be confused with the concept of the flagship store.

The concept is of general application and has to do with kick starting the process of agglomeration. Here's an example from Free Office Search:

The Maxim Industrial Park provided a significant amount of new office space in Glasgow when it opened this year but the development has yet to find a "flagship tenant".

Speaking to the Hamilton Advertiser, Andrew Lapping, non-executive director of Tal Land Developments - the company behind the office scheme - explained that more space in the office park will be rented out once a large tenant is in place.

"Once we have a flagship (tenant) in place then we are sure the office space will fill up soon. This was indeed the case with our development in England and we firmly believe it will be the same with Maxim," he stated.

An old example of this is the original Canary Wharf building, now referred to as Number One, Canada Square.

From The Independent, 1993 (I didn't know we had the internet back then!):

MIRROR Group Newspapers, publisher of the Daily and Sunday Mirror, People and Sporting Life, is to move into Canary Wharf Tower, in Isle of Dogs, in a five-year, rent-free deal that allows it to back out if the Jubilee Line extension is not built...

You always get this with new office blocks or shopping centres. The landlord knows that he is not just tapping into the general rental stream that arises from the general location, but that this can be enhanced if he can tap into the more specific benefits of agglomeration.

Larger well-known retailers with their own 'brand' will attract shoppers of their own accord, and once they are there, you will get the smaller, less known more niche retailers as well to broaden the general shopping epxerience.

So it makes sense for the landlord to offer a flagship retailer a low rent or rent free initial period (relative bargaining power and all that), and once he is in place, the smaller retailers will be happy to open up nearby and pay a higher rent than otherwise. Sooner or later, the process becomes self-perpetuating, and the original flagship retailer has to start paying rent, because he benefits from the presence of all the other outlets which have opened up in his wake as much as they originally benefitted from his presence (the landlord ends up collecting the lot).

But more or less the opposite happens on The Traditional High Street, because all the units are owned by individual landlords or proprietors who have no interest in the overall rental value of the whole street.

All a landlord cares about is squeezing out as much rent as possible from his one or two units, if he can't get what he imagines his units are worth, he will either give up the battle and leave the shop empty and gradually deteriorating or he will hand it over to a charity shop. Both of these strategies are encouraged by Business Rates exemptions and both can lead a high street into decline, this is the opposite of the process of agglomeration explained above.

An owner-occupier business often keeps slogging on long after it has stopped making sense (they don't realise they could make more money by renting the shop out to a new more profitable business). This is also encouraged by the fact that actual business profits are taxed heavily (something they notice) and the rental value is taxed relatively lightly (which they just put up with).

If all the little land owners on a failing high street acted for their own common and collective benefit, then a few of them would knock down their buildings and replace them with a car park or put up a larger building and offer it to a 'flagship' retailer for low or no rent, but clearly this doesn't happen because all the other land owners would have to agree to pool the total rental value/extra business (enhanced by the presence of the car park or the flagship retailer) and share it with the people who've agreed to knock their buildings down.

Here endeth.


Robin Smith said...

This is not true

"But more or less the opposite happens on The Traditional High Street, because all the units are owned by individual landlords or proprietors who have no interest"

Speculative vacancies are proof. Most high streets are owned by only several landlords.

Mark Wadsworth said...

Like everything I say, it is quite true.

It is not necessary for a hundred units to be owned by a hundred different landlords, if they are owned by "several" landlords who don't own contiguous buildings, the effect kicks in.

Speculative vacancies are the proof, that was the whole point of the article. So clearly you didn't understand it properly.

If there is only a very small number of landlords, i.e. one single landlord, he will try and fill up his units and not leave (too many of them) standing empty.

If needs must, he will offer a 'good' tenant a rent free period.

And by and large, you don't get charity shops in privately owned shopping centres.

The Stigler said...

The job of town centre management is arguably one for town councils, but as they're run by (generally) clueless morons with all sorts of agendas and a lack of experience, they don't know how to make town centres work.

Arguably, what we've actually borne witness to over the past 20 years or so is a competition between state and private provision of retail management. While the state is probably still bigger, especially in cities, the private sector has grown considerably. I'd guess that more people now go to the retail parks around Swindon than to the Town Centre.

Mark Wadsworth said...

TS, exactly.

But there is a best-of-both worlds option: the council owns the land and buildings and gets a private operator to run it for a share of the profits.

So British Land or whoever can manage the whole thing for 10% of the rents and the council can keep the rest.

And if Tesco or somebody want to open up, the council says "Certainly sirs, super, you tell us what kind of site you want and give us the building specifications and we'll build it for you and you can rent it from us."

The Stigler said...


Yup. I don't have a problem with that.

One equivalent observation - Seaside resorts and Theme parks. Theme park owners understand that there's a whole load of things they have to provide. Some of them don't make any money (like toilets and grassy areas), but that without them, people won't come.

Mark Wadsworth said...

TS, yes, hooray for theme parks, that's an example where they only work because one operator has control of the whole thing.

But why do a lot of them have such insane smoking restrictions? They're outdoors, FFS.

Kj said...

MW: Agreed with everything. But re smokking restrictions, that is the downside of private management of public spaces; they would manage it to their own purposes, and stricter smoking restrictions signals "family friendly" or some set of values. Ofcourse this they can do because of the general thrust that we´re happily supposed to accept restrictions, but private spaces, like malls, are always more restrictive, for better or worse.