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Location, location, location: Real estate economics

April's showers brought more than just May flowers. Months of soggy financial news and overcast credit markets ensured that "for sale" and "for rent" signs cropped up almost as quickly as lilacs and iris in commercial landscapes across the country this spring. Even if you're one of the lucky retailers who has more peonies than placards in front of your building, you still have some decisions to make. We asked three experts for tips on how retailers can not only survive in today's commercial real estate market, but also use it to their advantage.

Buyer beware?
As real estate prices plummet and interest rates drop, it's tempting to consider owning your building rather than renting. But before you call a real estate agent, take the following factors into account:

    Movin' on up. "If you think you're going to be in a location for up to 10 years or more, it makes sense to buy. If you think you're going to move in less than five years, you should lease," says Scott Testa, Ph.D., a retailing expert and marketing professor at St. Joseph's University in Philadelphia. If your store is expanding, you might want to put the money you would use on a real estate down payment into capital improvements instead, he says.
    Not everything's for sale. If your store is in a strip mall or another place where buildings are interconnected, it's extremely difficult to buy your space, says Ray Cirz, managing director with New York-based Integra Realty Resources, a commercial real estate valuation firm. Because malls are usually owned by one entity, "You have to do stuff like subdivide your store and make it a condo or do an easement in order to buy it," he says. One option is to buy a small strip mall and become your own landlord, subleasing the stores to other tenants.
    Bank on it. Despite the bad economy, there aren't that many freestanding commercial buildings for sale, Cirz says. The exception: banks and auto dealerships. "You could buy a vacant bank site, which is usually an acre, and demolish the building," he says. Banks tend to pay premiums for prime sites, Cirz says, so you'll get a good location at as much as 20 percent to 50 percent less than it would have cost three years ago. Bankrupt auto dealerships are leaving behind small buildings and a lot of land—perfect if you want to build a large store or need a lot of parking.
    Cash or carry. Because of so many loan defaults, banks are requiring at least 40 percent to 50 percent down on a commercial real estate loan, Cirz says. And although home-mortgage interest rates are dropping, commercial rates are going up. "In our recent survey, [commercial] interest rates were between 7.5 percent and 8.5 percent. Eighteen months ago, they were 6.5 percent," he says.

Renter's market? If you choose not to buy, now's the time to either move to a better location or lock yourself into a very favorable lease, as landlords scramble to fill vacant real estate. "For 5,000- to 20,000-square-foot stores, there is very little leasing activity taking place," Cirz says. Take advantage of that with this advice:

    Know the rates. "Rent levels have decreased roughly 20 percent throughout the country," Cirz says. Hardest-hit areas include California, Michigan, Florida, Las Vegas and the southern U.S.
    Posh up. "Most retailers I'm speaking with say now is a great time to get into areas they haven't been able to get into at rates they haven't had in years," says Dan Valerio, Americas retail and wholesale sector leader for New York-based accounting firm Ernst & Young. With bankrupt companies like Sharper Image and Fortunoff shedding stores, supplements retailers can even find space in high-end malls. However, Valerio cautions, don't expect your cold cases to share a connecting wall with Nordstrom's jewelry cases. "There are certain contractual restrictions in malls on where stores are located. It's not the Wild West at this point."
    Renegotiate—up to a point. Although Cirz says a landlord isn't likely to renegotiate your existing lease unless you can prove you're too financially strapped to pay rent, if you have fewer than three years left on your lease, by all means try to extend it with terms that are favorable to you. "You can basically get what you want in terms of the length of the lease," he says. Adds Valerio: "Most retailers are at least having dialogues to some degree with their landlords now."

Vicky Uhland is a Lafayette, Colo.-based writer and editor.

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