Lease Smarter, Earn More: The Ratio That Rules Retail
- Harry Wallach
- Jan 12
- 2 min read
Understanding the Rent-to-Sales Ratio
When evaluating the potential success of a retail tenant in any location, there are several important factors to consider. One key factor that is often used by commercial real estate professionals is the “rent to sales ratio”. This ratio helps gauge a tenant’s ability to generate enough revenue to cover their rent and other expenses, ultimately determining their long-term viability in the space.
The rent-to-sales ratio is a metric used to measure the impact of the cost of leasing commercial real estate space (office, retail, or warehouse) on a business’s revenue. It is also known as the occupancy cost ratio. The ratio is expressed as a percentage and is calculated by dividing the annual base rent or gross rent by the forecasted yearly sales. For example, if a business forecasts $1,000,000 in sales for the year and the base rent is $9,000 per month, the base rent to sales ratio would be 10.8% ($9,000 x 12 = $108,000 / $1,000,000).
The rent-to-sales ratio varies depending on the type of business. For example, retailers should target a base rental rate that is no more than 5% to 10% of gross annual sales, while a law firm may find a rent to revenue ratio of 15% acceptable. According to Bizminer, the ideal rent-to-sales ratio varies from 2% to 20%, depending on the industry type, location, site accessibility, utilities, size, and market conditions.
The rent-to-sales ratio is a key indicator used by investors to measure the performance and outlook of a potential acquisition. For a retail or QSR tenant, operating between a six to eight percent rent-to-sales ratio is considered healthy, where the tenant’s sales performance justifies the rent that they are paying the landlord. A low rent-to-sales ratio is desirable as it means that a business has low occupancy costs and is better placed to withstand economic volatility and rising supplier prices and staffing costs.
Consider the case of a boutique clothing store planning to lease a space in a high-end shopping center.
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