In recent years, it’s highly likely that you have heard about the transition of the east Orlando retail market from a tertiary submarket into a white-hot, sizzling trade area in which regional and national retailers and restaurateurs are pining to locate a store. One of the initial signs indicative of this type of transition is the rise in retail lease rates. Just five years ago, a retailer could easily find small shop space in the Alafaya Trail trade area for annual net lease rates in the $20 per square foot range. Today the highest retail net lease rate in the trade area is nearly twice that.

So how does that happen? What determines the dollar figure at which retailers can afford to lease space? How do landlords determine the dollar figure at which they are willing to lease space to a retailer? On the surface, many believe that it is purely supply from the landlords and demand from the retailers. This answer is only partially correct.

Ultimately, the net lease rate (known as occupancy costs) a retailer can afford is a function of the retailer’s gross sales. In his book Getting Retail Right!, John C. Williams asserts that, for the typical retailer, occupancy costs should ideally be between eight and ten percent of gross sales, and should never exceed 12% of gross sales.

So what does that mean to the local entrepreneur looking to go into business selling widgets to the residents of east Orlando? Let’s say, for example, a 1,200 square foot space is needed to house Widgets, Inc., and occupancy costs at the desired location total $30 per square foot annually. That is an annual total of $36,000 in occupancy costs. After business planning and research, the business owner finds that, given the desired location, he can sell 50 widgets a day for $20 apiece, or $1,000 in gross sales per day. Widgets, Inc. will be open every day of the year, excluding five holidays, for a total of 360 days out of the year. Let’s do the math: If Widgets, Inc. is open 360 days a year and has average gross sales of $1,000 per day, annual gross sales will total $360,000 ($1,000 x 360). Occupancy costs at the desired location equal $36,000, or ten percent of $360,000 ($36,000 / $360,000). In the mind of a seasoned retailer, these numbers add up in their favor and, from a purely financial perspective, represent circumstances under which they would be willing to locate a store to the market. If, on the other hand, widgets could only be sold at a pace of 50 per day for $15 apiece, that would mean gross sales would only equal to $270,000 ($15 x 50 x 360), and occupancy costs would equal 13.3% ($36,000 / $270,000) of gross sales. A savvy retailer would probably pass on locating a store in the market given these numbers, choosing to locate in another market instead.

And, finally, what does this mean to the residents of east Orlando? The rising retail lease rates signify a demographic that is growing in the areas of purchasing power and expendable income (remember, lease rates are directly affected by gross sales, or how much locals are spending.). And attracting some of the nation’s leading retailers and restaurateurs (think Outback, Best Buy, Target, etc.) to the trade area only confirms this. So, congratulations east Orlando – through your spending efforts, you have put your locale on the radar as one of central Florida’s hottest retail markets.