Retail zoning plays an important part in the valuation of commercial real estate. This standard approach breaks down a retail space into different areas – or zones – and each one has its value. This process is crucial for determining a retail space’s rental price.

Naturally, the most valuable area is Zone A, the front part of the store closest to the street, mall corridor or concourse. Subsequent zones, moving further back from the prime area, will then decrease in value and are labelled accordingly (Zone B, Zone C, and The Remainder).

In the UK, one critical aspect of retail zoning is the principle ‘In Terms of Zone A', otherwise known as ITZA. ITZA is a valuation metric that standardises the comparison of retail spaces by converting their entire area into an equivalent area as if it were all prime Zone A space.

This approach allows for a more accurate comparison between different retail properties, irrespective of their size or internal layout. ITZA calculation takes into account the decreasing “value” of space as you go further back from the shop front, providing a more accurate reflection of the property's worth from a rental perspective.

Understanding ITZA is fundamental for anyone involved in the commercial retail property market, whether you're a retailer looking to lease a space, a property owner setting rental rates, or an investor evaluating the potential return on a retail property.

Retail zoning and the ITZA method can give rise to a clearer, more consistent understanding of property values across diverse locations and layouts, and is therefore indispensable when it comes to lease negotiations, property appraisals, and investment decisions.

Retail zones explained

Before we discuss the ins and outs of retail zoning and ITZA, let’s first take a look at how retail zones are established. A retail premise is divided into several zones, as follows:

• Zones are 6.1 metres (20 feet) deep
• Zone A is nearest the window or shopfront
• Zone B is a 6.1-metre zone behind Zone A
• Zone C is a 6.1-metre zone behind Zone B
• Zones go from front to back until the whole area is zoned
• Anything behind Zone C is often called “The Remainder”

Understanding the Zone A Rate

Retail zoning is built around Zone A, which is considered the most valuable part of a retail space. This prime area is at the front part of the store, directly facing the street or corridor. This is where foot traffic is typically at its highest.

The conceptual value of Zone A is derived from its potential to attract the most customers and generate the highest sales. Without this concept, it would be difficult to set fair rental rates for retail properties.

The Zone A rate acts as a benchmark, represented by the cost per square foot. It is determined by a few factors, including location desirability, foot traffic volume, and the overall market demand for retail space in the area. The higher the Zone A rate, the more expensive it is to rent a retail space.

A tiered approach to retail zoning and rates

The Zone A rate extends beyond just the front portion of the store. It sets a precedent for calculating the value of the other zones within a retail property. Zone B and C are valued at a proportion of the Zone A rate. After all, these areas are still valuable but do not offer the same level of exposure and potential for customer engagement.

This tiered approach to valuation ensures that the rent charged for retail space as a whole will be an accurate reflection of things like the desirability and utility of other areas of the shop.

In practice, the Zone A rate sets a starting point for negotiations between property owners and prospective tenants, giving a clear basis for understanding how retail rents are structured. What this ultimately paves the way for is a constructive negotiation built on fact rather than assumption.

Grounding negotiations in an objective measure means that property owners, investors and tenants can work towards an equitable rental agreement reflective of the property's value, given the context of its location, the current market, and a handful of other factors.

Calculating retail rents using zoning

So while the process of calculating retail property rents is intricate, it’s an essential part of commercial real estate management. Incorporating the valuation of Zone A and extending to subsequent zones within a retail space contributes to the overall rental cost based on a standardised, relative value.

The calculation begins with determining the Zone A rate, which is the price per square foot for the most valuable part of the retail space.

As we’ve already seen, the Zone A rate serves as the starting point for assessing the rest of the property. Zones B and C are valued at decreasing percentages of the Zone A rate, acknowledging the drop in potential customer engagement and sales as one moves further from the front of the store.

For instance, Zone B is valued at 50% of the Zone A rate, and Zone C at 25%.

Thereafter, to calculate the total rent for a retail property, each zone's area is multiplied by its respective rate, and then all these figures are summed up.

Let’s say a shop has 1,000 square feet in Zone A valued at £100 per square foot, 500 square feet in Zone B valued at £50 per square foot, and 300 square feet in Zone C valued at £25 per square foot, a starting point for the total annual rent would be calculated by adding each zone.

‍

‍

The application of retail zoning and the ITZA calculation has implications for retailers, investors, tenants and property owners alike, as it directly influences rental negotiations and can ultimately affect broader strategic decisions about how a property is used, its layout, profitability, and a range of other considerations.

So, with an understanding of these implications, all parties can be much better informed and, hopefully, the lease negotiation can be much smoother and simpler.

Reinforcing zoning and ITZA calculations with technology

Although retail zoning and ITZA calculations are fundamental to the valuation of retail space, it’s not the only thing taken into account when determining how much rent should be. In order to truly get an accurate picture, retailers need much deeper insight into how retail spaces perform.

This is where retail analytics comes in. Advanced technologies like computer vision and IoT have transformed the retail landscape, giving forward-thinking property owners and retailers a way to uncover detailed patterns in customer footfall, dwell times, and movement trajectories.

A more granular view of how people interact with retail environments can be invaluable for making smarter zoning decisions, and understanding where customers spend the most time and which pathways they use can add much-needed data to support making certain areas more expensive than others, rather than relying on potentially inaccurate assumptions.

For example, if retail analytics reveals that a previously undervalued section of the store consistently experiences high footfall or longer dwell times, the value assigned to this area in terms of rent could be adjusted to reflect its true worth.

Although zoning and ITZA are fundamental starting points for any retail space valuation, technology and retail analytics can add an extra layer of cold, hard evidence to the negotiations, helping property owners set more accurate rents and extract maximum value from retail spaces.

When it comes to lease negotiations, it’s time to steer clear of ‘gut feeling’ and ground your decisions in accurate data on customer behaviour.

Fyma equips retailers with valuable insights into foot traffic, movement patterns, and demographics to help you optimise store layouts, improve the customer experience, maximise sales and revenue, and enhance operational efficiency for retailers.

For smarter retail decisions, book a demo with Fyma today.