For the Taking
Commercial Space Surplus Creates Business Opportunities
By Heather L. King
December 1, 2009
There is a lot of bad news for small businesses these days. Credit is tight, cash is short and customers have stopped buying. But despite the gloom, there is still some great news out there—commercial real estate is very much a buyer’s and leaser’s market and that isn’t going to change anytime soon.
Despite the fact that office space vacancy is at its highest level in Salt Lake County since 2004, landlords and sellers are willing to give more and take less. Whether buying or leasing, now is a great time for entrepreneurs to consider moving to a first “official office,” upgrading to nicer offices or a better location, or renegotiating current leases. Darrell Tate, retail and land specialist for Commerce Real Estate Solutions says, “It’s a very good time to be in the market and to be looking for space. You don’t have the same competition for the same space which means you are able to negotiate a better deal for yourself.”
Although market reports from CB Richard Ellis and Commerce Real Estate Solutions show lease rates around $20 to $21 per square foot, Dave Anderton, communications director with the Salt Lake Board of Realtors, explains that actual costs to business owners can be significantly lower because of the various concessions being offered by landlords who want to fill their spaces or keep current tenants in place.
Get Your Concessions Here
Lease incentives or concessions for the small business owner are now worth tens of thousands of dollars, if not more. From free rent to larger tenant improvement allowances, now is the time to negotiate (or renegotiate) the best least on any size or class of space.
“The most noticeable concession is free rent or rent abatement,” Tate explains. “A year and a half ago we weren’t seeing any free rent beyond the typical 60 to 90 days of no rent for the tenant to build out the space. Last year, the minute you opened your door for business you started paying rent. Now, in addition to a build-out period, we are seeing anywhere from four to six months of free rent on a five-year lease term.”
Such concessions may help a fledgling business retain some of its much-needed capital to use during the very expensive business launch time-frame. “It’s a nice cash flow management opportunity because that start-up capital and that start-up period is the most challenging time for entrepreneurs,” says Tate.
In addition to monetary incentives, another emerging trend in commercial real estate is more flexible lease terms. While a five-year lease remains the standard, interest in three-year terms is growing, thus, allowing smaller businesses to better manage their short-term goals and capital.
Even if a business already has an existing lease, Anderton recommends that entrepreneurs take a careful look at their available options given their unique situations. Tate agrees, “If you have two years or less on your lease, I think there is a real opportunity to sit down with your landlord and talk about a renegotiation of your existing lease.”
The most successful negotiations should not place unrealistic demands on landlords, but offer a win/win situation to all parties. “If a landlord is looking at one or two years of a term left and there is a risk of losing that tenant in today’s market and that tenant comes to the table and says ‘I’m willing to sign up for a new, fresh five-year term but in exchange I would like to see an X percent decrease in my lease rate’, that’s a fair exchange of value,” says Tate. “It’s always less expensive for a landlord to keep an existing tenant.”
Another recommendation is to present landlords with documentation that demonstrates that revenue is off significantly (10 to 20 percent or more) from previous years and have a conversation about a lease rate reduction that is tied into the business’ revenue. Most landlords will see better value in working with an existing tenant and the realities of current market conditions than losing that entire stream of revenue for the extent of the downturn.
The Silver Lining
Once overlooked as small fish in a big pond, landlords are now taking special interest in small businesses and entrepreneurs to fill their commercial spaces. “Landlords are generally more motivated to work with smaller, local businesses because the national retail chains have really put the brakes on,” says Tate. “We’ve seen a pretty healthy activity level among the small local and regional retailers.”
Finally, there is still more good news for small business owners. For those interested in purchasing property, several Small Business Administration loans, including the 504 commercial real estate loan program, are now available. The 504 loan can be used for purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities; or purchasing long-term machinery and equipment. This and other loans can assist in financing that would otherwise be unattainable for many in the current market.
Now is a great time to be a tenant or buyer in the commercial market, when space is for the taking.