Laura Palovich-Binder ran her massage business for nine years in Worthington, accepting annual rent increases and the occasional bonus of a free month’s rent.
But when her lease was set to expire last summer, she and her leasing agent shopped around. They found an list of eager suitors dangling free rent and offers to build out shell spaces to land her Water For the Soul Massage Therapy LLC.
“Most were definitely willing to negotiate, to help with build-out,” she said. “I definitely got a better deal than I could’ve (earlier).”
Palovich-Binder opted for space on Schrock Road in Westerville’s Parkview Center primarily for its high visibility and the readiness of the space, but several months of free rent was a welcome sweetener.
“We’re seeing more and different concessions. It’s more competitive out there,” said Curtis Hannah, director of Integra Realty Resources Inc’s. retail specialty and real estate tax practice in Columbus.
The New York-based real estate valuation and consulting company recently surveyed Central Ohio’s leasing community for its 2010 Columbus Retail Overview report, which found 94 percent of those questioned were offering free rent or tenant improvement allowances to fill empty storefronts in shopping centers. It was the first year the company asked about concessions so statistical comparison couldn’t be made, Hannah said, but the practices anecdotally seems more widespread.
“Landlords are doing well if they can get tenants to renew at the current rate,” said Robert Matias, senior vice president of retail brokerage services with Columbus brokerage Equity Inc. “That’s tremendously different from the recent past, where there’d typically be a 10 to 15 percent increase over the previous rent.”
Getting breaks
Concessions are nothing new, but they have become more of a necessity for landlords, Integra’s report found. Hannah said lower rents are common. The average monthly rent requested by landlords for retail space in Central Ohio rose from $13.63 a square foot in 2008 to $13.70 last year, according to the report, but what the tenants paid after negotiations declined by between 10 percent and 15 percent.
No rent has become more common as well, the report found, with landlords offering on average two to three months free on new deals.
“Historically, a lot offered tenant improvement allowances, but they’re not as willing to give up cash up front for that now,” Hannah said. “They’d rather give free rent.”
Foregoing rent for a period doesn’t leave the owner on the hook financially as improvements can if a tenant cannot fulfill a lease agreement, Hannah said, citing the plight of Steve & Barry’s LLC as an cautionary tale. The Port Washington, N.Y.-based sports apparel retailer set up in several high-rent locations early last decade that came with expensive tenant improvement allowances. When the company went bankrupt in 2008 and closed its stores, he said, landlords that gave money to the retailer wound up taking a hit.
“No owner wants to be left holding the bag when a tenant with high (tenant improvements) fails to fulfill a lease agreement,” Hannah said.
Big chains as well as small retailers have benefitted from flexible landlords. Columbus-based Big Lots Inc., for example, said more affordable rents are a reason it opened more stores than it closed last year, including a store near Polaris Fashion Place that the company said it couldn’t have afforded previously. The closeout retailer said it opened eight of 52 stores last year in such higher-end locations, and expects to put 30 of its planned 80 store openings this year in such spots.
Getting better?
According to Integra, the market’s retail vacancy rate dropped to 15.1 percent for the year, down from 16.9 percent in 2008. The real estate listing service Xceligent Inc. put the vacancy rate at year-end at 12.5 percent, while Marcus & Millichap Real Estate Services Inc. pegged it at 12.2 percent.
Integra predicted the area’s retail vacancy rate would drop to 14.9 percent this year, but Marcus & Millichap projected a rise to 12.6 percent, which would still place Columbus among the 15 worst in the nation, a list topped by Cincinnati and Cleveland.
Retail analyst Chris Boring of Columbus-based Boulevard Strategies, in his annual report of retail trends and issues, said his view on Central Ohio market is split between stable and stagnant. He also cited a Grubb & Ellis Co. report that said the area retail market is no longer overbuilt.
Marcus & Millichap’s report predicted the beginnings of a recovery in 2010, with tenant rosters stabilizing and rent cuts slowing. Hannah said the supply of retail space should remain stable because a handful of small centers are under construction with other projects on hold until better conditions arrive.
Matias said Equity’s research indicates the sea may change again in the not-too-distant future, driving a decline in concessions.
“We’re telling our people that the supply is so hindered, so crippled,” he said. “Supply is down, so demand will rise.”