Reviewed by Gary E. Wilson, President & Designated Broker · Managing Greater Seattle rentals since 1982
Retail is the only commercial asset class where the landlord's leasing decisions change what the remaining space is worth. In an office building, a poor tenant in suite 300 is a credit problem. In a retail centre, the wrong tenant — or a dark anchor — reduces the traffic every other tenant depends on, and their rent with it.
That interdependence is what makes retail leasing a merchandising exercise rather than a space-filling one. The centre generates customer traffic collectively, each tenant draws on it, and some tenants contribute far more than they consume. Filling a vacancy with whoever will sign is not a neutral act.
Wilson Management leases and manages retail property across Bellevue, Seattle and the Eastside. For the wider service see Retail Property Management, and for how retail differs from other commercial types see our post comparing retail, office and industrial.
Traffic Generators and Traffic Consumers
Every tenant in a centre sits somewhere on a spectrum between drawing customers in and benefiting from customers already there.
Generators bring people to the site for their own sake — a grocery anchor, a well-known destination retailer, a busy fitness operator, a popular restaurant. They generate visits at predictable frequency, and the frequency matters as much as the volume: a grocery anchor producing weekly visits supports the small tenancies around it far better than a destination visited twice a year.
Consumers benefit from that traffic without adding much of their own — most small service and convenience tenancies. They are perfectly good tenants and they pay rent, but a centre composed entirely of them has no reason for anyone to visit.
The practical implication is that generator space is worth protecting even at a rent concession, because the rent given up is recovered across the rest of the rent roll. Losing an anchor to hold out for a higher rate is frequently a net loss once the effect on every other tenancy is counted.
Co-Tenancy Clauses
Co-tenancy provisions give a tenant a remedy — commonly reduced rent, sometimes a right to terminate — if a named anchor closes or occupancy falls below a stated threshold.
They exist because tenants understand the interdependence and want protection against paying for traffic that no longer exists. From the landlord's side they are a real contingent liability, and one that is frequently invisible until it triggers.
The management discipline is knowing, at any moment, which co-tenancy provisions are live across the rent roll and what each one entitles that tenant to do. Before an anchor lease expires, before agreeing to let an anchor go dark, and before signing a new lease with a co-tenancy clause of its own, the cascade should be understood rather than discovered.
The failure mode is a landlord who negotiates an anchor departure focused on that one lease, and then finds that six other tenants have moved to reduced rent and two have termination rights.
This page is general information, not legal advice.
Exclusive Use Clauses
Exclusivity grants a tenant protection against the landlord leasing to a competitor within the centre, and it is standard in retail for good reason — a tenant investing in a location does not want the landlord to place a direct competitor two doors down.
The management problem is that exclusives accumulate. Over years a centre can collect a set of overlapping restrictions that materially constrain what can be leased, and each new lease is negotiated by someone who may not have all the earlier ones in front of them.
Two practices prevent this. Maintaining a current schedule of every exclusive in the centre, with its precise wording. And checking any prospective tenant's proposed use against that schedule before terms are agreed, not before signature.
Breaching an exclusive is expensive. Remedies can include damages, rent abatement or termination rights for the protected tenant, and the landlord is generally left having to unwind the new lease it just signed.
Reading the Rent Roll as a Portfolio
A retail rent roll is worth examining for concentration in several directions at once.
Category concentration. Several tenants in the same segment move together in a downturn.
Expiry clustering. Retail expiries that bunch in one year create both risk and, occasionally, opportunity to remerchandise deliberately.
Anchor dependence. How much of the centre's traffic and income relies on one tenancy, and what the co-tenancy consequences of losing it would be.
Percentage rent contribution. Where leases include percentage rent, sales performance tells you which tenants are thriving and which are struggling — usually well before they default. See CAM and Percentage Rent.
Leasing to the Centre, Not the Vacancy
When a unit comes free, the temptation is to fill it with the best available covenant at the best available rent. That is the right instinct for an office suite and an incomplete one for retail.
The questions worth asking are whether the use adds to the centre's draw or merely occupies space; whether it conflicts with an existing exclusive; whether it will generate the kind of traffic the neighbouring tenancies benefit from; what its parking and servicing demands are; whether its hours align with the rest of the centre; and whether it will still be here in five years.
Hours alignment is underrated. A tenancy closed when the rest of the centre is busy contributes nothing to the environment and creates a dead frontage during peak trading.
Use restrictions in the lease matter for the same reason. A broadly drafted permitted use lets a tenant change what it does without the landlord's agreement, which can alter the centre's composition in ways nobody chose.
Screening Retail Tenants
Retail covenant assessment differs from office because the tenant's income is generated at the premises. A retailer's ability to pay depends on whether that location works for their concept — which the landlord frequently understands better than a first-time operator does.
Beyond the financial review covered in our post on screening commercial tenants, the retail-specific questions are whether the operator has run this concept before, whether the location suits their customer, whether their sales expectations are plausible for the space and the centre, and whether they are capitalised for the ramp-up period rather than only for the fit-out.
An undercapitalised tenant who fails in month eight costs the landlord the fit-out contribution, the lost rent, the re-letting cost and a dark unit during the process.
Frequently Asked Questions
What is a co-tenancy clause?
A provision entitling a tenant to a remedy — usually reduced rent, sometimes termination — if a named anchor closes or occupancy falls below a threshold. It is a contingent liability that stays invisible until it triggers.
Why protect an anchor at a rent concession?
Because the traffic an anchor generates supports every other tenancy. Rent given up on the anchor is frequently recovered across the rest of the rent roll, and losing it can trigger co-tenancy remedies as well.
What happens if we breach an exclusive?
Remedies can include damages, rent abatement or termination rights for the protected tenant, and the landlord generally has to unwind the lease it just signed. Checking a prospective use against a current schedule of exclusives before agreeing terms prevents it.
How do exclusives become a problem?
They accumulate. Over years a centre collects overlapping restrictions, and each new lease is negotiated by someone who may not have all the earlier ones to hand.
Does it matter what hours a tenant keeps?
Yes. A unit closed while the rest of the centre trades contributes nothing to the environment and creates dead frontage at peak times.
How is screening a retail tenant different?
Their income is generated at the premises, so the question is whether this location works for their concept — and whether they are capitalised for the ramp-up, not just the fit-out.
What should I watch in the rent roll?
Category concentration, expiry clustering, anchor dependence, and percentage rent sales data, which usually signals a struggling tenant well before a default does.
Get Started
In retail, who occupies the space changes what the rest of the space is worth, which makes leasing a merchandising decision. Wilson Management, Inc. has been making them in this market since 1982.
Request a free analysis or contact us. You can also reach our Bellevue office at (425) 453-0089, 1380 112th Ave NE #203, Bellevue, WA 98004.