December 2014 / January 2015
KERN BUSINESS JOURNAL
Commercial space offerings a ‘landlord-driven market’ By Diana Greenlee
hen Jim Reed started his pizza business with a franchise six years ago, he never realized the undertaking would be so expensive. After struggling for three years, he dropped the franchise, renamed the business Cubbies Chicago Style Pizza, and renegotiated his lease with his local landlords. They lowered the rent on the 2,500-square-foot building at Hageman Road and Calloway Drive from $6,500 to $4,500 per month. Reed’s restaurant has built a following, and is doing well now, but he knows there may be bumpy roads ahead. He’s cautiously optimistic about Cubbies’ future. “The only thing (the landlords) really take care of is four walls, a ceiling, a roof and a floor,” said Reed, 49. Nathan Perez, Cushman & Wakefield Pacific Commercial Realty Advisors sales associate, said all points are negotiable when it comes to retail leasing, but leniency and flexibility like Reed experienced isn’t common in this market. “Landlords used to offer 10 or 20 cents a square foot (discount),” said Perez, 27. “Now it’s more like 5 cents per square foot.” The agent said he’s seen a couple of retail property deals allowing landlords to collect a percentage of gross sales in addition to rent and “triple net,” which means tenants must shoulder the burden of property tax and insurance along with common area maintenance, including grounds’ upkeep, on top of their own business taxes, liability and fire insurance. “It’s rare, but there’s a little bit more of it,” he said. “It was more common 25, 30 years ago.” Marty Starr, a principal at Newmark Grubb ASU & Associates, said landlords offering properties expect to make
PHOTO BY CASEY CHRISTIE
Jim Reed, owner of Cubbies Chicago Style Pizza, takes a phone order at lunchtime.
improvements by painting, laying carpet or installing shelves. But as the economy has improved, commercial space in attractive areas and good condition is harder to come by, and tenants don’t have the leverage they once did. Larger improvements, such as a heating, ventilating, air conditioning or an electrical overhaul, may end up being on the tenant’s bill. Starr, 41, said expensive upgrades can be amortized over the life of a lease and offer landlords, many of whom are in a position to be choosy, more confidence in their lessee. “(Owners) like to make sure the tenant has some skin in the game,” he said. Olivieri Commercial Group Principal Anthony Olivieri echoed Starr. He said industrial, office and retail vacancies
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have reached pre-recession levels and, “in some cases, we’ve surpassed them.” Olivieri, 49, said lessees requiring minimal work on a space before taking possession of a property might ask landlords for a “tenant improvement allowance,” which is the same concept as free rent; it comes down to a compromise in rent or improvements. Today, landlords are passing on more of the costs to tenants. Even office properties, once immune to triple net, are seeing a shift in the trend. “This is definitely a landlord-driven market,” Olivieri said. “Landlords are in a strong position to negotiate and not make as many concessions.”