Retail ripple effect: Bad times for commercial real estate can mean a tenants' market

With For Lease signs going up on windows of empty stores in shopping centers and malls since the end of the holiday shopping season, the ripple effect of the slowdown in retail spending on commercial real estate is becoming more evident every day. NAI Global, a major real estate leasing and financing firm, reports that the national average rental rate for regional malls fell 21 percent in 2008, and the vacancy rate nationwide increased by 15 percent to 5.6 percent, USA Today reports. Jeffrey Finn, president and CEO of NAI Global said that he expects to see "further erosion in all sectors before vacancy rates and rental rates stabilize in late 2009 or early 2010."

"The national retail scene is a mess, and it is going to impact us," said Gene P. Spiegelman, an executive director in global real estate services firm Cushman & Wakefield's retail services group, according to The New York Times, noting that landlords in some of the city's trendiest areas have begun lowering asking rents.

The strains on commercial real estate companies coming from vacancies and tight credit, as they struggle to refinance their own debt, will give tenants greater leverage when signing new leases or renegotiating their existing leases smbiz.com says. A landlord may be willing to grant significant concessions to keep a good tenant, depending on the market. The chances of renegotiating a lease are higher for small businesses and if the business is located in retail (vs. office) space and in an older building.

Even tenants who are having difficulty paying their rent may be able renegotiate lease terms, smbiz.com says, because an empty store can be a drag on a commercial property. From a landlord's perspective, it may be preferable to keep a tenant in a space, even though lease terms may have included a personal guarantee for the balance of the lease owned when the space is vacated. Renegotiating a lease is complicated, smbiz.com says, and advises the business owner to bring his or her accountant to a lease meeting with the landlord.

Renegotiating lease terms can have business advantages for property owners as well, Robert McDonnell, vice president of Ciminelli Real Estate told WIVB in Buffalo, NY. "You can keep a tenant and downsize by a few thousand feet but open up space for another opportunity down the road."

Experts advise signing new leases for shorter terms. Finding a good sublease may be an even better option for a small business, since the business that is vacating the space might be desperate and willing to offer a lower rent.

Large national retailers have announced plans to close some locations and to pressure landlords for concessions on others, The Wall Street Journal reports. Office Depot Inc. has hired consultants to help it close 112 of its 1,275 North American stores and negotiate with landlords on others. Chico FAS Inc. is trying to renegotiate, renew, or end 340 of its leases coming due through 2011. Pier 1 Imports Inc. is seeking to win lower lease rates on the 200 leases that it has coming up for renewal in the next year, the company says. And Gap wants to cut its 40 million-square-foot portfolio by 10 to 15 percent, mostly by reducing the size of its stores and, subsequently, the rent they pay.

Some landlords are resisting pressure, the Journal reports, and others are willing to let a tenant fail, especially when the rents are low. But as retail property owners try to obtain credit in the coming year, rising vacancies and pressure on lease terms will only add to their problems, the Journal reports, increasing the risk that commercial real estate companies will be forced into bankruptcy.

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