Maximizing Success

Real estate’s role in portfolio optimization

Real estate plays a key role in optimizing retail store portfolios. Stores must have enough square footage but never too much. Portfolios must also match the number of stores across regions to customer demand. 

“Portfolio optimization means reducing or adding store square footage and matching merchandising and inventory to customer demand in a trade area,” said Kenneth Katz, principal with Houston-based Baker Katz. 

“Right-sizing is a real portfolio optimization issue,” agreed Jeff Green, president and CEO of Jeff Green Partners in Phoenix. “I’ve seen retailers get side-tracked by competitive issues. Competing drug stores, for instance, sometimes make decisions about maximizing market share and maintaining competitive advantages. That can be dangerous. You can cannibalize your stores if you put too many into a market.”

Green noted that national retailers use technology to model trade areas and match the number of stores to demand. 

“Technology enables us to understand customers better today — especially customers with loyalty cards and an address on file,” Green continued. “Retailers can see that a customer in a Chicago neighborhood has no children and a large disposable income. Using that information, retailers model demand and determine the right size, best locations and an appropriate number of stores for a trade area.”

On the surplus property side, retailers pare down square footage. “Retailers might try to negotiate a rent reduction,” Katz said. “At certain points in the cycle that works, but not now. Landlords today won’t reduce rents — there is too much tenant demand for space.

“Second, retailers can reduce the size of existing stores — which often doesn’t work. It’s difficult to redesign an interior to accommodate another retailer — if the landlord doesn’t object. Better to build smaller stores going forward.”

Finally, continued Katz, a retailer might relocate to smaller stores and dispose of a portfolio of large stores.

In today’s competitive retail environment, making the right decisions about adding and disposing of retail square footage is a key element in retail success.

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