An Update on Commercial Real Estate

The retail sector may be suffering, but some opportunities do exist for small business

JJ Unger and Debi Rosenbaum, Real Estate Brokers, NAI NBS

Struggling retailers have been dominating the news this fall, and big-box retailers from Linens ‘n Things to Circuit City to Mervyns have filed for bankruptcy. Though Black Friday sales were better than expected, industry insiders are forecasting disappointing retail sales this holiday season.

But a glimmer of hope in this recession is an opportunity for small businesses that have funding and good business plans to gain space not previously available to them.

Retailers today have a lot to be worried about. November’s retail spending was the weakest in more than three decades, according to the International Council of Shopping Centers. Consumers are spending more carefully than in the past, and though consumer confidence has recovered a bit from its steep drop in October, the mood remains tenuous. So many retailers are drastically cutting prices in order to move product, but their profits may suffer.

Third quarter retail vacancy in the Portland metropolitan area was 6.0 percent, and that number is expected to rise in coming months, though it may take time for the numbers to reflect what landlords and tenants are experiencing. Some businesses are leaving space that sits vacant for months, while others are downsizing, potentially subleasing space they are not using.

In these difficult times, certain retailers are getting along better than others. In general, consumers are looking to get more bang for their buck. Grocery stores are doing well as Americans eat out less and opt for prepared foods at the grocery store over restaurants. Thus many restaurants are experiencing tough times, with the exception of fast food. Stores focused on value, like discount stores, thrift stores, and pawn shops, are in a good position, but today even stores like Target and Costco are seeing diminished profits.

There is a possible bright spot: small and local businesses may be in a position to benefit from the stagnant market. Oregon is said to be an incubator of small business, and aside from the state’s many successful smaller homegrown enterprises, major companies like Nike and Columbia Sportswear have prospered in the state and gone national and international.

Landlords try to attract tenants with strong credit, and in the past, that meant established big-box and chain retailers. Now, with many of those retailers having financial problems, landlords may be willing to give small businesses of all types a chance.

For entrepreneurs who have financing, a fresh idea and a strong business plan, an attractive lease could be in the cards. Landlords don’t want to have retail space sitting empty, so rates and terms may be negotiable, with some landlords willing to give concessions like free rent or more money for tenant improvements. Landlords are also getting creative in marketing space, especially during the holidays; for instance, some are displaying local art in vacant store windows to fill the space and attract potential tenants.

In addition, existing small business tenants may have an opportunity to upgrade into a higher quality space than they could previously afford. With lower rates and concessions, those in Class B space may now be able to move up to Class A.

Rather than signing a long-term lease on a new business that hasn’t been tested, some small business owners are opting to enter the market through subleasing. They can get a smaller space and test their concept for a year or two, then relocate, expand or sign a longer lease if the enterprise proves successful.

Another opportunity for certain small businesses to gain space is through a trade show atmosphere. For instance, HomeShow America recently leased nearly 28,000 square feet in Vancouver for a new location. A home-related vendor can set up a display at this location for a fraction of the price of a space of their own. The home show is open daily, so it’s convenient for consumers to access many businesses in one location and it can provide vendors with exposure.

Though much of the focus in the news today is on struggling businesses, landlords are also feeling the economic crunch. General Growth Properties, which owns more than 200 malls around the nation, including the Portland area’s Pioneer Place and Clackamas Town Center, has considered filing for Chapter 11 bankruptcy. So though some landlords are providing incentives like free rent, others may be financially unable to do so.

As is the trend throughout commercial real estate, many retailers of all types and sizes are taking a wait-and-see approach to expanding or opening new enterprises. Though the much-anticipated presidential election is over, the impact of the new administration’s policies and actions on retail will not have an immediate effect, so for many the wait continues.

No one knows quite when this recession, which began in December 2007, will end. While hoping for a quick turnaround, experts are predicting that retail will see tough times through 2009, and potentially into 2010. In the meantime, retailers are doing everything they can to attract consumers and maintain profits.