Used correctly and in the appropriate situation, retail real estate KPIs (i.e., Key Performance Indicators) can be very useful in measuring performance and by informing corrective action plans if needed. However, many businesses choose KPIs that don’t provide useful information or stick with pre-existing KPIs that may no longer be relevant in the context of their current business environments. Let’s explore and discuss some common KPIs using examples from my experience in the retail real estate industry, so you can be better informed in establishing or reassessing your own KPIs.
A Quick Overview on Retail Real Estate KPIs
A KPI is a quantifiable metric that is derived or calculated from data. Ideally it should be expressed as a ratio, average, percentage or rate. Some common retail real estate KPIs include:
Sales PSF (Per Square Foot)
Sales PSF is the average of sales earned per square foot of available space. This indicator shows how efficient the company is with the use of existing space. This information could be used in the classification of the retail real estate asset, and it may lead in the asset value itself or the type of loans the asset may qualify for. On an operational level, Sales PSF may affect what type of tenants the business wants to obtain or attract for the asset. This indicator may also give insight to the overall health of the asset, the local market or the larger economy.
Occupancy is the ratio of rented or used space to the total amount of available space. This indicator may show the desirability or the overall health of the asset. It may also reveal what kind of corrective action to take on a management level or operational level with regard to the asset.
Cost of Occupancy Percentage
Cost of occupancy percentage is the total cost of a tenant as a percentage of total sales. The variance in what is considered healthy largely depends on the profit margin of the products sold. Higher margins support higher occupancy costs. For example, a jewelry store would typically be able to support a higher occupancy cost than an apparel store. The percentage can then be compared against comparable benchmarks to assess relative health of tenants.
Real Estate NOI (Net Operating Income)
Real estate NOI is leasing and specialty revenue less the necessary operating expenses, which determines profitability. This measure will indicate if it is worth to own and maintain a property.
Debt Service Coverage Ratio
Debt service coverage ratio is a measurement of available cash flow to pay current debt obligations, which is calculated by dividing NOI by debt obligations. This provides a quick ratio that a property is generating enough cash to service its debt. Many lenders set a minimum around 1.2 to 1.25. Ratios below that could indicate an inability to meet requirements and may lead the asset to be in default, which in turn can lead to foreclosure or impairment to the value of the asset.
Selection Framework – A Quick Overview
With so many available KPIs out there, how do you choose which ones to track? Since KPIs are tied to business goals, it makes sense to first define the goal then choose measures that directly impact the goal. The KPIs you track should be easily quantified, actionable, simple, measured timely and accurately and, of course, connect to your goal and overall strategy.
For example, let’s say a shopping center wants to change tenant mix to revitalize a specific area of the center and increase foot traffic, occupancy and sales. They might take actions like hiring more leasing people or brokers, or they might explore the possible relocation of tenants. To track the progress of their revitalization, they might look for an increase in:
- occupancy percentage,
- foot traffic and
- comparable sales PSF.
After selection, you should assign responsibility or put in place methods to track, monitor and report the metrics. In our shopping center example, the responsibility could be assigned to the shopping center general manager to track monthly occupancy, foot traffic and sales figures and report to the asset management team.
Another point that should be considered when selecting KPIs is the difference between lagging and leading KPIs:
Lagging KPIs show you what has already happened and how you are progressing toward your goals and objectives. Although you really can’t do anything about what’s already happened, this data can help in deciding what you want to do going forward.
Leading KPIs indicate where you might be heading. Having good leading KPIs may allow you to take corrective actions before it is too late. Leading KPIs are harder to measure, but they can offer valuable insight. (An example would be retail space under construction in the immediate market, which in turn becomes an increase in inventory/supply of rentable space, which may affect rental rates and occupancy, etc.)
Application of KPIs
The wonderful thing about the KPIs listed above is they can be used on a portfolio level as well as a more-granular, single-asset level. For example, you could take the occupancy for a portfolio of five retail centers for an average occupancy of 85%. Drilling down to individual centers may reveal that one center has an occupancy of 95% while another has an occupancy of 60%, suggesting underperformance of that center.
These metrics can be viewed in a variety of ways – such as over a time period to see trends, or as a snapshot in time to look at variances. Using the same occupancy example, two measures at the beginning and end of the year may reveal an increase or decrease over a year of operation. A measure at the end of the year could be compared to the expected occupancy given in the forecast (or plan) at the beginning of the year.
Real World Example of Retail Real Estate KPIs in Action
Years ago, I was on a management team that oversaw a portfolio of shopping centers in a Southeast market of the US. We noticed the aggregated, portfolio-level KPIs trending in a negative direction, including decreases in sales PSF and occupancy. After a closer look, we noted that a lot of the negative trends we were seeing was a result of a single center. Not surprisingly, this showed a decrease in NOI as well.
On top of that, there was debt on this particular center, and we had to review loan covenants to ensure we were still in compliance. At that point in time, we did an assessment on whether we should change the operating strategy in terms of which tenants we should target or ways to increase sales PSF and foot traffic. We also made an assessment on the asset strategy as there was a possibility that we had to provide more capital to refinance due to not being able to cover debt payments and book an impairment on the asset to reflect an updated value.
Due to promising KPIs around increases in sales and foot traffic to nearby centers within our portfolio due to adding restaurants and other food related tenants, we decided on a combination of actions. We infused more capital in order to refinance and redevelop a wing of the center to accommodate two full-service restaurants, theorizing that the two restaurants would revitalize that wing of the center and lead to increased traffic and sales to existing tenants. This would also allow us to avoid impairing this asset, which would further complicate ownership and operational metrics.
After the redevelopment was complete, we noticed positive trends in metrics almost instantaneously in the measures of increasing sales and foot traffic in the specific area. This also saved us from having to impair the asset and presented a much better outlook.
Of course, there was much more to the process and decision-making that went into the redevelopment project that led to the turnaround, but at a high level, we were able to identify issues using KPIs (both lagging and leading) in order to take corrective action for the center.
With so many possible measurements, understanding and selecting relevant KPIs is a great way to set up business decisions. Clearly identifying and understanding what the business goals are will facilitate a process in identifying useful KPIs and result in a higher user acceptance throughout the organization. A clear framework in selecting and maintaining relevant KPIs will keep your business organized and aware of the impact of strategic decisions.
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