Anchor Tenant Definition & How to Find them?

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As a CRE owner, finding and retaining tenants is essential to maintaining your property’s cash flow and value. But not all tenants are equal. Especially in retail—but also in industrial, office, and medical buildings—you often have anchor tenants. 

What is an anchor tenant?

An anchor tenant is a large, prominent business that attracts most of a building’s foot traffic. They also tend to take up a large portion of the building’s space.

According to Alex Judge, Director of Investments at 615 Ventures, “The larger footprint (relative to the size of the property) can be both a blessing or a curse. If the anchor tenant is successful, you have a large percentage of your property that is stabilized and generating rents consistently. If you lose an anchor tenant, the effect is just as negatively impactful in that you lose a large portion of your property rents.”

 Either way, anchor tenants play a key role in the financial success of the property.

The value of anchor tenants

Now that you know what an anchor tenant is, let’s break down the value they offer.

Firstly, anchor tenants typically sign long-term leases that span years or even decades. Consequently, they provide a lot of rental income stability for property owners. In addition, anchor tenants help bring in customers for other smaller tenants.

“Similar to candy bars at the checkout line, a consumer may visit a shopping center for the grocery but the coffee shop next door might catch their attention on the way in,” Zach Cook, Investment Analysis Manager at 615 Ventures, said. “An anchor tenant drives traffic so that other tenants may succeed.” 

The second-order effect of anchor tenants boosting overall foot traffic is that you can charge other tenants a premium for rent since you’re not just providing physical space at that point but proximity to a high-traffic area. Savvy investors don’t let that value go uncaptured.

Finally, all of the above can help maintain and boost a property’s value, which is tied to revenue. That way, when you go to sell, you can maximize your profit. 

What to look for in an anchor tenant?

When considering anchor tenants, look for one with a good reputation and broad consumer appeal. 

“For example, a grocery store appeals to the general population, whereas an outdoor sporting goods store appeals to a more niche sector of the population,” Cook said.

Don’t forget to also properly vet potential anchor clients. You want them to have a strong operations team known for taking good care of leased space. This not only improves customers’ experience but reduces the likelihood of costly maintenance issues.

The biggest challenges to finding the right anchor tenant

That said, finding and attracting the right anchor tenant can be challenging. 

For one, the best ones know their value. This can give them the upper hand in negotiating lease terms. For example, they might demand smaller or less frequent rent increases fixed over a long-term lease with multiple extension options. Similarly, they might require a large tenant improvement allowance. For owners, this can reduce cash flow, slow return growth, and decrease the sales price when exiting the investment.

Another challenge to finding strong anchor tenants is the rise of online shopping. According to Boston Consulting Group, ecommerce is poised to capture 41% of global retail sales by 2027—up from 18% in 2017. This is why Bed Bath & Beyond, for example, went out of business last year along with many other retailers. 

“Truthfully, these days anchor tenants aren’t quite as popular or helpful as they used to be,” Seamus Nally, CEO of TurboTenant, said. “… Many people simply don’t shop in stores anymore. So, the decreasing popularity and success of these anchor stores is the single biggest struggle in commercial real estate with finding a good anchor store.” 

Concessions you should and shouldn’t make to anchor tenants

To land the right anchor tenant, CRE owners must often make compromises. However, while some concessions are worth it, others may not be.

For example, if you already have an anchor tenant, that shouldn’t keep you from leasing to a similar business. “It usually doesn’t matter if anchor stores are similar, and in some cases, it may even help,” Nally said. “If people can’t find what they want in one, they can walk over to the other.”

In contrast, some anchor clients could demand a site layout that leaves unusable space. “In this situation, the landlord should consider if the reduced rentable square footage is worth getting the deal done,” Cook said.

To determine whether a concession is reasonable, landlords should always consult market experts such as attorneys, brokers, and experienced investors. The right answer will depend on the location, lease terms, anchor tenant’s credit, and ultimately what you can accept without feeling unsatisfied with the deal. 

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