Retail Occupancy Costs to Sales Ratio

In order to structure the best economic lease terms for both landlords and retail tenants, it is critical to understand the occupancy costs as they relate to the retailer’s business. 
 
The Occupancy Costs, or the total of all expenses the tenant pays for their retail space, is usually displayed as a ratio to sales. The formula Annual Gross Rent divided by Annual Sales = Occupancy Cost(as a %) is closely watched by investors as they demand the costs be at a level that still allows the retailer to purchase inventory, pay employees, and make a reasonable profit. Changes in occupancy costs has a direct consequence to profit margins as noted by Guess’s recent fall from grace. The higher the costs of goods and labor, the lower the acceptable occupancy costs.
 
Clothing retailer Men’s Warehouse has a 40% gross margin and pays an occupancy cost of 14% while Jamba Juice has an occupancy cost of 16% but higher gross margins. Regardless of the size or type of retailer, benchmarking occupancy costs is a critical metric that quickly determines the economic health of a retailer. It’s also a relatively easy formula to calculate. For example, say a retailer with 1,500 square feet is paying $36.00 per square foot in annual rent plus $12.00 is CAM/Taxes/Insurance/utilities and has annual sales of 400 per square foot. Dividing the Annual rent ($48.00 psf total costs psf X 1,500 sqf ) of $72,000 by total annual sales of ($400 X 1,500 sqf ) $600,000 equals 12% as the occupancy costs to sales ratio. A more detailed Proforma spreadhseet is available from IREM