Declining Retail Rents

In the world of commercial real estate, it’s a buyer’s market — and that applies to retail rentals too. If you’re struggling to stay out of the red or just need to free up some cash, now’s a good time to negotiate for a lower lease rate.

There have been several pieces written recently about the pressures that are being brought to bear on retail landlords by major national retailers. These retailers have been pushing back hard on landlords to rewrite leases to reduce rents, and have been negotiating very hard when leases come due for renewal. All of this is part of an effort to reduce overall rent expenses, as well as bring unprofitable stores back into the black.

This is a trend that is likely to continue for the next several years, regardless of how the economy fares. Commercial real estate has been under much of the same pressures that residential real estate has been under, although banks have not as yet found themselves as weighted down by bad commercial mortgages as they have by bad residential mortgages. Still, the expectation is that the commercial real estate market will continue to weaken, and lag any recovery that takes place.

Independent retailers need to recognize that they currently have a lot of leverage in their dealings with their landlords, regardless of the size of their business or the size of their landlord’s business. It is now a buyer’s market. Retail vacancies are up and they are continuing to climb, with few takers. Rents are under enormous downward pressure.

As a matter of competitiveness, if retail rents are declining in your market, you cannot continue to pay rents that were set in a very different environment before the recession set in. The difference between what you negotiated then and what rates are now could be the difference between being in the black and bleeding cash. At a minimum, if you are paying higher rent than your competition, you are at a competitive disadvantage, a disadvantage that will quickly catch up to you in this environment.

Understand where retail rents stand in your market. That’s what you need to be paying. Do not hesitate to ask to re-open your lease agreement, regardless of how long it’s been in effect or how much time is left on it.

As much as landlords want to hold the line on reductions or concessions, they need to understand they won’t be collecting anything if you have to go out of business (they don’t need to know whether this is a real possibility or not). Landlords recognize that good tenants are hard to come by right now. Don’t be afraid to push, or drive a hard bargain.

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