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What is an “Anchor Tenant?”

February 25, 2020 | by Brandon Carter
Reviewed by real estate expert Michael Colacino

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

When you’re scrolling through websites or visiting office complexes scouting new commercial space, you’re likely to consider location, transportation, potential foot traffic, amenities, pricing, and related factors. But before you sign a lease, remember to first find out all the information you can about the anchor tenant that rents space in the area.

An anchor tenant is a well known business that leases office space in a neighborhood, building complex or any other office space development that attracts not only a lot of customers but also other companies to the area. Also called a draw tenant, key tenant or a prime tenant, the anchor tenant can expect to pay less rent than other tenants and may even have some input on how the spaces around them are rented out.

Anchor tenants look a little different in office complexes than they do in shopping malls, and the concept of the anchor tenant is changing thanks to online shopping and changing market demands.

Office Space Anchor Tenants: Putting an Office Complex on the Map

A big-name anchor 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. Office building or office complex anchor tenants tend to be banks or Fortune 500 companies. Consider 200 Park Avenue outside Grand Central Station. Though few people recognize the site by its address, many New Yorkers know it as the MetLife or PanAm building because those have been the building’s two anchor tenants for many 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 such as 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.

met-life-building-grand-central-station
The MetLife building at 200 Park Avenue, by Grand Central Station

Retail Anchor Tenants: Shopping Centers and Tourist Hubs

A retail property such as a shopping center, a shopping mall, or a tourism hub often has a department store—usually a global retail chain—as its anchor tenant. Shopping centers and malls typically display the anchor tenant’s name front and center on the marquee, with all the other businesses and stores in the shopping center listed below it. Industry-standard dictates that anchor tenants will likely occupy anywhere from 45 to 70 percent of the shopping center’s total square footage. In addition, retail anchor tenants typically pay 5-10% lower rental prices than other tenants.

Though the increasingly popular online shopping trend has made business tougher for all mall tenants, online shopping negatively affects anchor tenants the most. Back when malls were booming, stores like Macy’s and Sears operated on hundreds of thousands of square feet and sold everything under the sun. Families frequented the mall as a popular weekend activity; they enjoyed combining seemingly-infinite choices with great deals and a widescreen shopping experience.

In a classic case of “rising tides lift all ships,” shopping mall anchor tenants’ performance brought in business for the other tenants in the mall. Because anchor tenants recognized they were responsible for much of the foot traffic flowing through the property, they used this to their advantage when negotiated discounted rental rates with landlords. Landlords happily offered reduced leasing rates because it appeared these anchor tenants would keep bringing in customers, new businesses —and with them, an infinite source of steady income.

The Future of the Anchor Tenants Concept

Whether we blame online retail or assume the USA simply built too many shopping malls, it’s clear that malls these days aren’t doing as well as they used to. However, landlords and tenants have discovered new ways to keep the mall lucrative. One example is the Apple Store, which, in recent years, has become an increasingly common—and successful—anchor tenant for shopping malls. In fact, 75 percent of Goldman Sachs’ list of the top 100 malls contain an Apple Store.

Another trend involves the rise of developers implementing public spaces, rather than businesses, as anchor tenants. That’s an interesting concept because open spaces are free for visitors. 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. Still other shopping malls and power complexes are choosing to use a gym as the anchor tenant. If large numbers of people show up to use the gym every day or multiple times per week, they’re likely to stick around to grab food, or they might shop at surrounding stores or make use of businesses nearby.

How Will the Anchor Tenants Affect Your Business?

Maybe your business is the anchor tenant in the development or complex. If so, congrats! We would all like our businesses to be the anchor tenant, but for most of us, that’s not going to be the case. Whether you work in sales, legal enterprises, food service, medicine, or another field, anchor tenants will affect you. But how will the anchor tenant with whom you share a customer pool affect your business? Is operating near a big-name business—your area’s anchor tenant—good or bad for you?

First, remember that the presence of a big-name company usually indicates an area will be ideal for operations. That’s because successful anchor tenants attract other, smaller “satellite” companies to the area, as well as amenities like gas stations, coffee shops, and restaurants. 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 isn’t usually what happens. They’ll notice their options while travelling through an area, or do their research first online and look up prices and offerings on the various company websites.

Actually, it makes sense to be located near a competitor. People rarely know what all of their options are in any given place, 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 Guthrie Center for Real Estate Research. “But what we’ve shown is a nontrivial and non-intuitive lesson: it’s not always true that I would like my competitor to fail.”

In general, a good anchor tenant is good for your business. Keep in mind how these anchor tenant factors will affect your business—and scrutinize lease terms—before you set up shop. For example, if you plan to sublease your office space to another business, your choice of subtenant might be limited. Property owners 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.

Anchor Tenants: Final Takeaways

The biggest tenant in an office complex or neighborhood might greatly influence the economy, structure, price, and even construction of an area. However, anchor tenants don’t just support 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.

The best way to understand the ins and outs of your lease, get the right information about potential real estate neighbors, and evaluate your legal subleasing options is 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. Contact us today to learn more.

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