Timing is everything
Landlord concessions are on the rise
Every lease Wireless Zone has seen lately comes with a free rent incentive ranging from one to six months, as well as more dollars for tenant improvements and rent discounts.
Nazmi Ozokur recently negotiated a great lease for his new Tropical Smoothie Café in Mobile, Alabama. Landing a top real estate location - at an attractive price - was what helped Ozokur decide now was the ideal time to open his first franchise business.
The new Tropical Smoothie Café will open at the end of April in a space once occupied by Starbucks. Ozokur was able to negotiate a 15 percent rent reduction, two months of free rent and a small tenant improvement package to pay for renovations to fit the Tropical Smoothie design.
Franchisees such as Ozokur who once had a hard time getting the time of day from landlords are now on the receiving end of a full-court press as landlords scramble for tenants amid a challenging retail climate. Shopping center owners are offering concessions such as free rent, tenant improvement dollars and delayed rent increases to attract tenants as retail occupancies continue to slip.
Vacancies at neighborhood and community shopping centers climbed to 8.9 percent at year end, according to Reis Inc., a real estate information and analysis company. The growing vacancies have squelched the recent history of steady rent hikes. Effective rental rates fell 1.1 percent last year, and Reis is predicting rates will drop another 3 percent to average $16.88 per square foot by the end of 2009.
Sweetening lease offers
Many landlords are offering concessions on top of rents that are either at or below 2008 levels. "For franchisees, especially for franchisees of nationally recognized brands, this is a perfect time to take advantage of the situation," says John Bemis, executive vice president, director of leasing and development at Jones Lang LaSalle Retail in Chicago. "There are deal concessions being made available that were not available 12 months ago, and won't be available 12 months from now."
The extent of concessions varies depending on the property and the prospective tenant. Shopping centers that are under pressure to bolster occupancy rates are likely to be more aggressive. For example, owners with occupancies below 80 percent are putting up bigger incentives to attract and retain tenants.
Likewise, tenants that are more desirable, such as franchisees with a national brand name, good credit and a solid business history are likely to get the best deals. Major retail brands like Gap or Banana Republic are going to get the highest reductions - perhaps a 15- to 25-percent rent reduction on an existing lease, notes Faith Hope Consolo, chairman of retail leasing at Prudential Douglas Elliman Real Estate in New York.
The timing couldn't be better for brands such as Wireless Zone, which launched a new, larger store prototype in 2009. The redesigned store ranges between 1,200 and 2,000 square feet - about 50-percent bigger than its previous format. Wireless Zone currently has about 300 stores and plans to open an additional 80 to 100 locations in 2009. Wireless Zone typically leases inline space at shopping centers and malls.
"Landlords are being more aggressive. So it's a great time to lock into a five- or seven-year lease," says Sean Fitzgerald, vice president of franchise development for Wireless Zone in Middletown, Connecticut. Every lease Wireless Zone has seen lately comes with a free rent incentive ranging from one to six months, as well as more dollars for tenant improvements and rent discounts.
Window of opportunity
Retro Fitness has seen a "180-degree turn" in many aspects of lease negotiations in recent months that includes free rent, more tenant improvement dollars and reductions in base rent, notes Eric Casaburi, founder and CEO of RetroFitness Inc. in Colts Neck, New Jersey. "Every single space we're looking at is offering free rent," Casaburi says.
In addition, some landlords are offering significant rent reductions and more tenant improvement dollars. For example, RetroFitness was looking at a space in Virginia where the landlord offered twice the tenant improvement dollars the company was anticipating. RetroFitness went back and said it wasn't enough, so the landlord also dropped the rent from about $12.50 to $8.50 per square foot.
"In my opinion, now is the time to come out with all the guns blazing to take advantage of these real estate opportunities," Casaburi says. RetroFitness currently has 46 stores open and 95 in the pipeline.
However, some experts believe that the retail real estate sector is "nearing the bottom" of this downturn. That means there may be a small window of opportunity to take advantage of rent concessions. "I believe that between now and June owners will be offering their most aggressive deal packages," Bemis says. "As the economy begins to improve, or is no longer deteriorating, we will see terms begin to move in a positive direction for landlords."