What is an “Anchor Tenant?”
When a familiar or impressive name is associated with something, people become more interested in it. When it comes to real estate, this “cool by association” principle manifests itself in the form of an anchor tenant. An anchor tenant—sometimes also called a prime tenant, a draw tenant, or a key tenant—is the leading, featured, big-name business that rents office space in any given development, complex, or neighborhood. The anchor tenant typically pays lower rent than the other tenants and may get some say in how the rest of the center is rented out.
Office Space Anchor Tenants
A big name tenant can do wonders for tenants trying to establish credibility, and landlords trying to fill vacancies. Anchor tenants help validate the area as an ideal place to do business. Consider 200 Park Avenue outside Grand Central Station — few may recognize the address, but many New Yorkers will know it as the MetLife or PanAm building, the building’s two anchor tenants throughout the years.
An anchor tenant’s presence can put an otherwise little-known neighborhood on the map or vastly change the character of an area. For example, companies like Etsy and VICE helped transform Brooklyn into a popular location for TAMI (Technology, Advertising , Media, Information) businesses looking to secure office space without dealing with Manhattan prices.
Retail Anchor Tenants
The term anchor tenant may be used most often when referring to retail properties — from shopping malls to tourism hubs. In the case of shopping malls, the anchor tenant’s name is quite literally front and center on the marquee, with all the other businesses in the shopping center featured below it. Industry standard dictates that anchor tenants will likely occupy anywhere from 45 to 70 percent of the shopping center’s square footage.
As consumers increasingly shop online instead of in person, malls have fallen on hard times, and online shopping negatively affects anchor tenants the most. Back when malls were booming, stores like Macy’s and Sears sat on hundreds of thousands of square feet and sold everything under the sun. They were every household’s weekend destination, combining seemingly-infinite choices with great deals and a widescreen shopping experience.
In a classic case of “rising tides lift all ships,” their performance positively impacted the other shops in the mall. They were responsible for much of the foot traffic flowing through the property, a fact not lost on them as they negotiated discounted rental rates with landlords. Landlords were happy to oblige with long lease terms, which appeared that they would engender an infinite source of steady income.
Whether it’s because of online retail or because America simply built too many shopping malls, these days malls aren’t doing as well as they used to. Interestingly, an increasingly successful anchor tenant for shopping malls is the Apple Store. In fact, 75 percent of Goldmach Sachs’ list of the top 100 malls contain an Apple Store. Another new trend is the rise of developers using public spaces as anchor tenants. Open spaces encourage people to stay in an area longer because they have space to walk around and rest as well as pretty things to look at, like fountains. People who stick around longer typically make more purchases.
How do Anchor Tenants Affect You?
We’re all like our businesses to actually be the anchor tenant, for most of us, that’s not going to be the case. So how will the anchor tenant phenomenon affect you? First, you may be able to judge an area by its tenants; that is, the presence of a big-name company in your industry might signal a certain location would be ideal for operations. That’s why anchor tenants attract other, smaller “satellite” companies to the area. Naturally, anchor tenants also attract potential customers. While you might worry that potential customers will walk straight past your company in favor of the bigger name, that actually isn’t usually what happens.
Actually, it makes sense to be located near a competitor. People rarely know what all of their options are, and even if they do, they like to have choices. When the businesses around you thrive, yours typically will thrive as well. “You’d think that if your neighbor closes their store, that’s good news because you can get their business,” said Efraim Benmelech, Harold L. Stuart Professor of Finance and Director of the Gutherie Center for Real Estate Research. “But what we’ve shown is a nontrivial and nonintuitive lesson: it’s not always true that I would like my competitor to fail.”
Anchor Tenants: Final Takeaways
The biggest tenant in an office complex or neighborhood can have a profound effect on the economy, structure, price, and character of an area. However, anchor tenants don’t just affect the economy and the market: they may also be able to influence how you use your space should you choose to secure office space there.
For example, if you are interested in subleasing your office space to another business, your choice of subtenant might be limited. Landlords often extend exclusive clauses to their anchor tenants promising they will not allow another business offering similar products or services to rent space in the complex. That promise would also apply to the subtenants you chose. Keep in mind how these anchor tenant factors will affect your business before you set up shop.
The best way to understand the ins and outs of your lease are to work with a tenant broker. These commercial real estate professionals can help you curate your office space search and negotiate lease terms, all at no cost to you.