Posted by Kyle Miller on April 10, 2006 at 14:49:40:
Bill,
Hope it went well today. Here are a couple of other quick thoughts:
Since landlords/tenants frequently seem to have minor(or major) gripes/disagreements and the grass is always greener on the other side, many tenants might consider what you have to offer. When your agent or you contacts a prospect, you’ll be in a unique position to let them know how much you’d love to have them in your location. It will be sincere, and they’ll be flattered.
Give your broker AND any procuring brokers an expiring special incentive for leases signed by x-date. If signed by that date, then it is paid for out of reduced vacancy cost. Note: this would naturally reduce your ability to give free rent. If not signed by that date, then no loss, but you have gotten the attention of more people.
See what businesses further away are ready to open up another (non-competing) location.
Related to that, look at a similar successful development that you like (good tenant mix) that doesn’t have any geographic overlap. See how many of the franchises & businesses would like to open a new location. Let them know that you’re also in discussions with their neighbors. The demographics & herd mentality could get the ball rolling for them to duplicate their cookie cutter success en masse at your location.
I observed that the rental rates for retail properties varies with the size of the property. Smaller the property higher the rental rates. For example see below the rates for various sized spaces at the Southgate Mall in Yuma, AZ. All rates are NNN
31,000 SF $14.00/SF/Year Anchor
52,000 SF $11.50/SF/Year Anchor
25,000 SF $15.00/SF/Year Anchor
700 SF $36.00/SF/Year Regional Center/Mall
I saw another property on Loopnet that is an ex Walmart center. The size is 135,000 SF and the rental rate id $6.00/SF/Year.
I’m wondering why such a huge disparity. Can anyone throw some light on this?
Wide range of rental rates -possibilities - Posted by Kyle Miller
Posted by Kyle Miller on April 08, 2006 at 02:58:35:
It’s typically the same across all asset classes, whether you’re talking retail, R&D, office, industrial, etc. The quick & dirty (and mostly accurate) answer is “economies of scale.” Buying in bulk is effective, even in commercial real estate (provided we’re not talking downtown skyscrapers --that’s a different story) when you are talking per sq. ft. rather than per once (or whatever).
Not only are the economies of scale derived during construction, but they continue during the property management phase. I.e. from a management perspective, it’s as easy or easier to handle one 100k sq. ft. building than half the space broken up into 2k sq. ft. units. Smaller units need the extra revenue to support their cost structure. Plus, landlords/brokers are less likely to be as flexible on the smaller units, since they don’t care as much --spending the time/money/effort to land the stubborn small holdout isn’t worth it, since that unit is only a small part of the overall development. Conversely, the larger tenant has more power, since the landlord’s risk/reward ratio may have to deal with 0%-100% vacancy, depending on the deal.
A couple of other quick notes to wrap this up:
Regional Center/Mall -A lot of that is also based on demographics & traffic, which a mall both feeds upon and attracts. Those small cell phone kiosks (in the Silicon Valley Bay Area malls) can be leased out at $8k-$14k/month. Wow.
Some owner-user businesses buy in bulk to get the space they need and pick up a larger asset. That is, they’ll purchase 40k sq. ft. of space when they only need 20k (or whatever). This gives them a cheaper per sf on the 20k they will use, and then they can lease out the other 20k at the higher, smaller price, eventually ending up with a much bigger asset and room to grow (and also with the difficulties/risks of being a landlord).
*ex-Walmart centers -Other than the “bulk” issue, these are also cheap because they are extremely hard to fill or convert. Walmart has a special website for its real estate. I’ve heard that ex- big box stores can be a blight issue, sometimes because the original store is left vacant to keep competition from gaining a foothold. Not sure if that’s true, but I wouldn’t doubt it. Think of when a store closes one location to open a “super” store.
Anyway, I tend to be wordy and ramble excessively, but those are my thoughts on the subject. Hope it helped.
Posted by Bill Taylor on April 05, 2006 at 22:33:52:
My guess is that of supply and demand. 135000 sq ft of vacant space and the type of space that you would be glad to get what you can. I would think the price per sq ft would be pretty cheap on that type of property as well because it would be so difficult to get occupied. As far as the other spaces, I myself have a center of 30000 sq ft with 10% currently occupied. If we don’t get something rolling pretty quick I would probably be left with few alternatives but to lower rents and then have some nice bumps once the property gets occupied and in succeeding years of the lease.
Re: Wide range of rental rates -possibilities - Posted by Bob Smith
Posted by Bob Smith on April 09, 2006 at 02:35:51:
Assuming they’re genuinely cheap (by which I mean at a discount from its value as a full big box, as you’re going to spend a lot of money carrying the property until it’s ready, though perhaps it’s impossible to get these properties at a good discount):
I’m not quite sure how the economics works out, but assuming good demand for smaller units couldn’t you turn 1 100k SF big box into, say, 6 15k SF units? Spend 10k SF on demising walls and interior entranceways. Separate main electrical and maybe some new plumbing to the units; they’d probably have to share HVAC, though. Given the numbers given by the original poster, you probably have $5/SF difference between a 100k SF tenant and a 15k SF one. By lease value:
Going out:
$10/SF x 100k = $1,000,000
$500k renovation @ 10% 10 yrs = $79290
If you think this renovation cost is way under, tell me.
Coming In:
$15/SF x 90k = $1,350,000
Net:
$1,350,000 - $1,079,290 = $270,710 annual net rents
I have no idea if that’s enough profit for an experienced commercial player, but it doesn’t look too bad from here in the cheap seats. This example assumes no net discount after carrying costs during renovation and leaseup are considered. If you ended up with a 20% net discount (reduce $10/SF to $8/SF) that would be an extra $200k/year in your pocket.
Posted by Kyle Miller on April 08, 2006 at 03:42:58:
Bill,
I know we’re going off topic, but I agree with KJ and share his concern. One of the most powerful tools you have is the creative use of free rent, paid for by KJ’s “time value of vacancy.”
Since this is a retail development, a large portion of what a tenant pays for and expects is traffic, as you know. That means filling up the space is a priority. At a high vacancy rate, nobody wants to risk moving in. At a high occupancy rate, the tenants feed off of each other’s traffic, make more money, and can afford to pay more rent.
Naturally, the early “motivated” deals of yours won’t be as favorable to you as they could be, and it will also take some time for you to develop the right tenant mix. With that in mind, you may want to keep the term of these early deals relatively short, perhaps with options at “the then prevailing (or 95% of the then prevailing) market rate.” Naturally, those rates are either set by you or in accordance with other stabilized like product. (To avoid sticker shock and angry tenants, it’s probably best to have already made significant rent bumps to get closer to your target.) Make sure the lease end dates are staggered, so that they are up at different times. This way, you can achieve the full value of your property when there’s not so much risk, and you can concentrate on bumping the rents one tenant at a time.
Back to the creative use of free rent…
Tenant uses time/money to make needed improvements. Although not so likely with retail, it’s possible they just might make the improvements that allow you to command higher rates later on.
Take the rent, but then give them a TI allowance worth x-months. Same thing, just more complicated, but some people respond differently.
Do what your broker should be doing, and contact potential prospects already in business nearby, anybody you would like to have as tenants. Most importantly, find out when their leases are up! Do what your broker can’t do, and offer the free rent to cover the last 1-3 (or whatever is right for you and them) months that they need to keep paying at their current location. That way, you can overcome the obstacle of them not wanting to pay double rent.
The rent may be free, but you still have them cover their share of the NNN costs. That will limit your exposure and the pain somewhat.
Free rent can be creatively allocated differently. For instance, instead of 3 months free, perhaps 6 months at 50% might be more interesting for a tenant. Maybe a year at 75%?? Go with whatever variation/mixture helps you and the tenant reach your respective (cash flow or otherwise) goals.
Related to that last idea, give cheap rent now, but let them know it and structure the lease for significant bumps in succeeding years to catch up. Although the time value of money is lost, at least you can achieve a higher effective rate.
Perhaps occupy 3000 sq. ft. (or whatever), but only pay on 1500 (maybe excluding NNN expenses) for the first three months. Some idea, different phrasing.
Just my late night thoughts. Hope it helps, and I wish you much success in leasing up the project quickly.
Posted by Killer Joe on April 06, 2006 at 24:21:39:
Bill,
When I read your property is still at a 10% occupancy, in all due respect I get concerned. Here is a ‘hot button’ you can use to accelerate your occupancy rate…whenever I consider a location, it has to meet my build-out criteria. This is just another term for free rent while I get my ducks in a row. It has an attraction to folks like me who can’t cash flow while we build our infrastucture.
One way to use this to your advantage is to offer advantageous terms to your prospective tenents that makes it attractive to locate, or relocate to your building.
I have had calls from site owners 90 days after my initial offer that would now agree to my terms (read three months of vacancy) for a build out allowance that were SOL because I had already contracted a site on my terms. If you are targeting long term tenents, they may have infrastructure needs that have to be resolved before they can cash flow. We’re not all Wal-Marts, some of us are small business folks who can stand a little more risk tolerance than the majority, an advantage such as a generous build-out allowance can garner a lot of attention. Don’t gamble, just be clear about your ‘time value of vacancy’. Although I just coined that term, realize that the time your site sits vacant, the more time you could have offered a build-out allowance to your tenents.
I say don’t gamble because a business without legs is a liability. You know that, but so is a vacant unit. The art is in the balance. HTH
Posted by Bill Taylor on April 08, 2006 at 19:49:44:
Great post and much needed advice. I will contact the leasing agent and see if we can follow thorugh with some of the ideas on Monday. Last week I called a sign person to get some now leasing information on my Pylon sigh and to amke me a couple of large banners for the front and rear of the building. I cannot stand back and just put it into somone elses hands completely. I have been making some of my own contacts with hopes that the leasing agents are out there making their own contacts. I will discuss wit the leasing agents about some up front free rents and then maybe add months on the end of the lease to compensate somewhat for them.
I think your ideas of contacting businesses close by is a very good one and offering free rent til their leases are up. I have only owned this project for a short time but my clock is ticking for expenses to start hitting me and I don’t wnat to carry this thing any longer than I have to. I think the ideas I have had from some on this board have been very valuable.