With the commercial real estate market plummeting, now may be the time to renegotiate your lease or buy. But experts say those who do a little homework before discussing rents and terms with their property owners stand to gain the most in the long run.
“Clearly what is going on [economically] with consumers on a whole is having a material effect on what’s going on with rents,” says Al Williams, principal of Excess Space Retail Services, a Lake Success, N.Y., real estate consulting and advisory firm that restructures leases for retailers. “If you’re a prudent retailer, you have some options to improve your lease, expand in most markets, relocate or improve your overall real estate portfolio.”
From the first quarter in 2008 to the first quarter of 2009, the vacancy rate for all retail property increased about 18 percent and the absorption rate, which shows how many vacant spaces become rented, went from 23 million square feet to minus 20 million square feet, according to statistics from Bethesda, Md.-based CoStar Group, which collects commercial real estate information. Rents nationwide have dropped from $17.63 per square foot in 2008 to the current $17.15 per square foot, and that downward trend is expected to continue, says Tim Trainor, communications director for CoStar.
“What’s good is that balance between supply and demand won’t get too out of whack when the economy rebounds,” he says. But in the meantime, retailers have room to get better deals.
Get flexibility from the landlord
Rents right now are very attractive for grocery retailers, says David Livingston, a Waukesha, Wis.-based supermarket consultant. Many property owners are more willing to be flexible on new or existing deals than they were five years ago.
“A lot of stores have gone out of business and in order to get these vacant spots rented, or keep them rented, landlords have to lower the rent,” he says.
Not only are some property owners willing to renegotiate to make existing leases more feasible, but what were considered conditions of the lease that made sense for both the retailer and the property owner several years ago may no longer be needed. Retailers can also use some of those terms as bargaining chips to get other options or lower rents.
“Grocers may have exclusives to carry certain types of products,” Williams says. “You can give up some of those exclusives, which could be attractive to the landlord, because it could open up space in the same complex for another operator of that service.” You could offer to give up signage space exclusions in your lease as well, he says.
Track the residential market
Depending on what’s happening in the residential market, the price of commercial rent changes on a monthly basis, Williams says. Areas such as Florida, California, Nevada, Arizona and parts of Idaho and Texas where the housing market took a beating are also communities where commercial real estate is struggling. Those same areas are where retailers have the best chance of locking in a great lease because of an abundance of rental space. Buying a building is also possible at rates that haven’t been seen in decades, Williams says. Nationally, the retail rental market is down 10 percent to 25 percent, depending on the marketplace, and in some extreme cases, it’s down 50 percent, he says.
Dale Reece, owner of Martindale’s Natural Market in Springfield, Pa., says he is planning to pay his landlord a visit based on the economic environment. Before he does that, however, he is following the markets and examining retail sales, housing vacancies and any changes in commercial property, which he believes will give his requests more weight.
“Given the economy and the affect it’s having on our sales, I am researching and waiting for the most opportune time to solicit the owners,” he says. Martindale’s Natural Market has been in its current location since 1972, and the company pays $24.50 per square foot a month for its space in a high-end area
Restructure your lease
Before renegotiating your lease, Williams recommends you thoroughly evaluate your business in terms of how it is producing and what can be done in the future to maximize business. In other words, how much money is the business making and spending and what are your future goals and projections for expenses and cash flow? Where is your business now and where do you want it to be in the future? Williams also suggests a new market study to determine how business, sales, marketing and demographics have changed since the lease was first signed.
“Look at your business as a whole and consider your business goals against what your current occupancy rate is, and then look at what you are paying your landlord in terms of the lease and how it’s affecting your overall business,” Williams says. “You really want to understand where you are and what you can give up in the process.”
Consider the following prior to negotiating a new lease:
Do a market analysis, or hire a professional to do it, to determine if you are overpaying.
Remember that occupancy costs—the price to run your business based on your square footage—should be 10 percent or below.
Reread the lease, especially locked-in provisions that don’t easily allow for changes to the agreement.
Consider parking ratios and give back spaces in exchange for better terms or other needed options.
Mom-and-pop stores may have more success than large retailers when renegotiating an existing lease. Retailers with multiple locations that have to maintain their corporate credit may not find a realistic way to wiggle out of a lease agreement, Williams says. But a property owner who appears inflexible or unwilling to give up anything may be willing to negotiate a cap allowance toward a store remodel. This is an option retailers should consider requesting during a lease negotiation, Williams advises.
Rent or buy?
Williams says 90 percent of grocers don’t buy; they lease. Supermarket consultant Livingston agrees with Williams. But they both say retailers who want to own are definitely in a buyers’ market right now. If you’re considering becoming your own landlord, they suggest you study your store’s demographics to determine the best location and negotiate a deal that makes the most sense.
“Get a professional to help you,” Livingston says. “If you’re buying, some opportunities exist for you now.”
Angela Cortez is a Denver-based writer.