I always wonder why retail storefronts sit empty. Why dont they just cut the rent?
There’s a strip mall near where I live that contains a typical assortment of suburban tenants: CVS, Domino’s, a beer-and-wine store. ... It briefly had a seafood store, too. That business failed, and the space has been unoccupied for at least five years, a “For Lease” sign in the window.
Every time I see that sign I wonder: Why would a landlord allow a retail space to sit empty for months and months — years, even — when, presumably, they could just reduce the rent and snag another tenant?
I’m no real estate mogul, but if I were selling a sofa bed on Craigslist for $200 and nobody was biting, I’d cut the price to $150 after a few weeks. That doesn’t seem to happen very often with commercial real estate.
My musings were prompted by the news that Barnes & Noble is closing its Bethesda store, unable to come to lease terms with its landlord, Federal Realty. They’ve kept the specifics of their discussions to themselves — and neither party would share them with me — but it’s been reported that the bookseller wanted to take up less space at Bethesda Row.
For some insight, I talked with people in the commercial-real-estate biz. Here's a bit of context: The retail vacancy rate for the D.C. metro area is low. It's 4.2 percent vs. a national average of 5.2 percent, said Max Peker, a market analyst with the CoStar Group.
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Veronica Salcido, an associate broker at KLNB, said that large publicly traded developers such as Federal drive a hard bargain because they have to. "When you have shareholders, the rent is everything," she said. "They're going to be really tough on the way they structure deals. At the same time, they have these prime properties where they're more likely than not to get those prime rents."
Larry Rosen, a broker at Commercial and Investment Realty Associates, said Bethesda has "really well-capitalized owners. They can wait for the type of tenant they want."
At the other end of the spectrum are smaller landlords who may have owned the land for a while and developed unrealistic opinions about it.
“It’s their baby,” Veronica said. Some of these mom-and-pop owners want others to see the property the way they do.
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“They want to hold firm and get the rent they envisioned when they bought the property,” she said.
Sometimes a space will hang around unoccupied because it has certain qualities that make it a challenge to rent. Parking may be a problem. Or zoning. Or visibility from the street.
Or the landlord is trying to achieve a certain mix of retail offerings.
“Sometimes landlords just have a preference in terms of tenants they hope to get,” Veronica said. “If you have a gym, you want a smoothie concept.”
Larry said that because so much development is going on across the area, many landlords have taken to putting redevelopment clauses in their leases. These allow the landlord to terminate the lease if the property is renovated.
A 10-year lease ties the landlord’s hands. “He can’t get out [of the lease] if he finds a better tenant,” Larry said. “If the property is reconditioned, then you can vacate the tenant.”
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A redevelopment clause can dissuade some potential tenants from signing a deal, especially those that would have to do a lot of work on the space and want a long-term presence. Said Larry: “What restaurant is going to spend $300,000 or $400,000 and then have the landlord have the right to kick them out?”
That can mean a property sits vacant.
I wondered whether landlords are reluctant to cut the rent because they’re afraid existing tenants would get miffed and demand to know why they are paying $25 a square foot when their new neighbor is paying only $17.
Veronica said that happens, but only rarely. After all, what’s a tenant going to do if he loses that argument? Will he relocate to cheaper digs?
“What’s their alternative?” she said. “The cost of potentially moving for most businesses is hundreds of thousands of dollars.”
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The market determines everything. “Tenants know they got a lease at a certain time when things were more expensive,” Veronica said. “Landlords have their fair share of tenants coming back and asking for a rent reduction, but they don’t normally point to other tenants. Usually it’s the market. It’s a function of the sales they’re getting.”
All of this just reinforces that I wouldn't be a very good real estate mogul. Whatever shopping center I owned would have to include a tailor and a laundromat. If I didn't lose my shirt, I'd probably get taken to the cleaners.
Twitter: @johnkelly
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