As with many real estate professionals, I am deeply concerned with the amount of vacant space on “Main Street”. It’s easy to put all of the blame on e-commerce, but I want to see if we can find a solution. Like the old saying goes: worry about what you can control rather than what you can’t control.
As I struggle with this vacant space issue and work with my restaurant and landlord customers everyday, I am actually thankful for the background that working in Connecticut has given me. In the CT market, you have to do everything to survive. That includes tenant rep, landlord representation and investment sales.
About 5 years ago, I saw a tremendous interest of restaurateurs looking to expand in my market. I was ready and nimble. I completed some of the most prominent and successful restaurateurs in my market. During those negotiations, I realized I liked representing the tenant more than the landlord and began to concentrate on being a tenant rep.
The key to every deal is the motivation of the tenant and landlord. If the landlord wants to rent his space, he/she can, providing they are willing to make the financial incentives part work. Same for the tenant. If the tenant really wants the space, there is always a deal to be made. A good broker can figure out sticking points and minutia, providing everyone is truly motivated to make a deal. There is always a middle ground if both sides are motivated to make a deal. A good broker will find it.
The internet has changed everything. Big Box is getting smaller, junior anchors are in high demand. Restaurants are desperately needed to drive foot traffic and repeat business. The pendulum has completely swung in favor of the tenant. That’s why I only try to represent tenants. I don’t see this trend reversing anytime in our lifetime. Only landlords that understand this dynamic shift will hold on to their tenants or attract new ones to vacant storefronts. That includes reducing rent or CAM, or offering shorter term leases, additional landlord improvements, cap ex or good guy clauses and no personal guarantees thereby mitigating some of the risk currently borne by tenants.
The good news for landlords is that very little retail supply is being built, so maybe one day the pendulum might get back to more of an even keel. In the foreseeable future, I believe the tenants hold all the cards in lease negotiations.
It’s a universal trend. The only real exceptions are high growth areas such as Nashville, Austin, Charlotte or Boston. NYC has some of the best demographics in the world with both density and medium income, yet retail vacancy is struggling in some of their key areas as well. Rents need to reflect that tenants don’t make any money if their operating costs are too big a percentage of sales. That is a NYC problem for sure. Having an iconic brand and using it as a billboard on 5th Ave for the world to see is no longer enough, the store has to make money. I know I saw the same two deals that you saw with McDonald’s and Krispy Kreme both announcing mega-flagships in Times Square. I’m telling you rent needs to reflect this new reality.
I have certainly seen the pendulum favor landlords before but that ship has sailed. Amazon and the plethora of online retailers have changed the leasing environment forever. It feels to me like we are in uncharted waters.
Those realities in the past have always led to rents coming down and lenders foreclosing on failing projects. The assets get sold now with a much lower cost basis, thereby enabling the new owner to reduce rents.
As I work with my clients to find a solution, I am seeing things I have never seen before. These uncharted waters have brought on new potential challenges: including local governments forcing a landlord’s hand to reduce rent or face a vacancy tax.
It strikes me as a knee jerk reaction. Maybe the landlord is doing an assemblage and can’t rent the space or they lose all the development rights. Maybe it’s a structural vacancy, meaning the landlord needs to keep it vacant in order to remodel or redesign the space. Maybe the co-tenancy being offered would hurt the center’s existing tenants. I believe in free markets. The landlord may have loan covenants and can’t lease the space under a certain dollar amount or it triggers additional loan reserves or worse a loan default. That is just not fair to a landlord who has invested in the property.
Certainly the potential of a potential tax could be a very useful tool for the broker. Imagine being able as a tenant rep broker to use the potential tax as leverage to get the landlord to reduce his rent. I am just not sure I am entitled to that additional leverage.
It feels like insult to injury. The landlord has vacant space. His operating expenses remain the same yet his/her NOI (NET OPERATING INCOME) has been reduced. Now you want to fine the landlord on top on the losses they are already suffering from. It will drive down property values and reduce the investor pool willing to invest in real estate. I don’t believe that is a positive outcome, even if rents drop a bit.
Additional pressure on retail vacancies is coming from “de-malling.” Many of Metro New York’s municipalities are also feeling the pressure of their retail malls becoming dinosaurs. They need to be reinvented, sports themes, escape rooms, virtual reality rooms are replacing traditional big box retailers. You have to give the consumer a reason to leave the house, they order on line for everything. The catch phrase is experiential retailing. The sooner the mall figures it out, the better position they will be in.
One of the really creative solutions that we are seeing on Main Street and in the Malls is the advent of the Pop-Up store. They are essential to the tenant to test a new product or service in a particular market without extreme risk of failure. The landlord wants new ideas for retail concepts. It’s truly a win-win for the landlord and tenant.
The good news with all of these challenges is that this is a great time for a restaurant to shop for space to launch or expand. Landlords are starting to figure it out, albeit slowly. A good restaurant can make or break a shopping center. It’s crucial for the success of the entire center, not just the vacant space.
I am here to help. Call me 24/7 at 203-430-7811 or my email kravetjeff@gmail.com. In fact, I am somewhat embarrassed that there is virtually no time where I can’t be reached. I don’t do downtime well. I love what I do and truly can’t get enough of it.
