By Ashley Fletcher Frampton
aframpton@scbiznews.com
Published July 20, 2009

Retailers are looking for money-saving bargains on commercial real estate these days, and, in many cases, they are finding them.

As asking rates for retail space are about 20% lower in the past year by some brokers’ estimates, and marketwide retail vacancy is at about 10%, some tenants who have reached the end of their lease terms are trading spaces or downsizing to save money.
Others are moving up to larger spaces or better locations that could boost business for about the same cost.

Still others aren’t waiting for the lease to run out: Many businesses that are struggling financially are asking for rent reductions in the middle of the lease term.

“They are asking all the time. They’re all asking,” said Brent Case, president of Coldwell Banker Commercial Atlantic International.

Brokers say tenants’ asking for lease concessions is not a trend just in Charleston — it’s nationwide. And not all tenants asking for rent reductions are actually hurting.

Some steadier businesses are jumping on what has become a rent-reduction bandwagon, hoping for a deal like the one their neighbors got.

But getting a break is not as easy as asking for one, commercial brokers say.

Playing hardball
Landlords are increasingly asking for sales records as evidence that a tenant truly needs help and is not just “fishing for deals,” said Will Sherrod, retail leasing agent with Anchor Commercial Corfac International.

Elizabeth Stuart Design owner Muffie Faith is closing her King Street store, pictured above, and consolidating in West Ashley. Some retailers are getting short-term breaks on their rent, but Faith said her landlord denied her request. (Photo/Leslie Halpern)

“Landlords are not just saying, ‘Yes, I’ll be glad to do it,’ ” Case said. “They’re saying, ‘OK, prove to me that you’re in a hardship and I’ll do it.’ ”

That’s the response Bill Sohn, owner of Sohn & McClure Jewelers, received when he asked his landlord for a better deal on rent at his James Island store.

Sohn was at the end of his lease term, renegotiating for the next several years and hoping to take advantage of a softer real estate market.

“All they could say was, ‘We want your P&L,’ ” Sohn said, referring to his store’s profit and loss statement.

Sohn, who said his business is doing well despite the recession, wouldn’t share it. Negotiations hit a standstill. So Sohn took advantage of the market in a different way — he moved.

Sohn & McClure’s new space in South Windermere Center is nearly twice as large as the James Island store from which he moved, and he’s paying about the same in rent. Sohn said it’s also a better location because the space housed a jewelry store for decades. 

Brokers say tenants like Sohn, at the end of their lease terms, have more leverage than those in the middle because they can actually pick up and leave if negotiations don’t go their way.

“They can play a little bit harder ball,” Sherrod said.

Elizabeth Stuart Design is another local retailer making a move after hitting a dead-end with lease negotiations. When her King Street store’s lease came up for renewal a few months ago, owner Muffie Faith said she was hesitant to sign another five-year lease downtown in an uncertain market — especially given the high rates on King Street.

“It’s expensive, and we’re seeing a lot of the smaller businesses leave,” she said. 

Faith said she asked her landlord for a rent reduction for a few months after hearing that nearby stores had received more generous concessions. When the answer came back “no,” Faith said she decided to consolidate operations at her other store, a larger space on Savannah Highway, in September.

“I just decided to roll the dice and consolidate and make a plan to go more places” to buy more diverse products, said Faith, whose stores sell home decor, antiques and jewelry.

Give and take
In situations in which landlords do cut tenants some slack on rent, hoping to avoid a vacancy, often they’ll negotiate higher rents down the road to recoup the money.
Negotiations that Sherrod has experienced are a give-and-take, not a giveaway, he said. Landlords also have bills to pay, and permanently reduced rents devalue their properties.

“If there’s a reason for a landlord to offset rent now, he’s going to want to get it back later,” Sherrod said.

Typical concessions are 10% to 20% off the rent for six months or a year, Case said.
Case said savvy landlords will research market data to determine how the tenant’s industry is doing, and they’ll scope out the tenant’s options for relocation.

“They’ll call your bluff,” Case said.

But in today’s market, retailers might find they have the upper hand if another location suits their needs. Sherrod said some landlords are offering incentives to new tenants, including space improvements, lower rates and smaller increases over the term of the lease.

Geoff Southard, a broker with Carolina One Commercial, said a tenant he worked with recently was offered six months’ free rent to move to a new location.

Retail vacancy rates range from a high of about 15% in Berkeley County to a low of about 5% in downtown Charleston, according to a June report by Anchor Commercial Corfac International.

East Cooper, West Ashley, North Charleston and Summerville submarkets have vacancy rates between 9% and 11%.

Tighter than some think
Case said vacancy rates in Charleston are lower than in other parts of the country that have been overbuilt, like Florida, Ohio and Atlanta. Tenants here aren’t getting the same kind of lease concessions as in those areas, he said. 

Retailers “can’t go down the street for half the rent,” Case said. “That product is not available.”

Case said the Charleston retail market is tighter than some people realize. Even though “available” and “for lease” signs are ubiquitous on most commercial corridors, he said little of that space is prime, Class “A” real estate.

“Most retailers, in a difficult economic time, are not going to take a ‘B’ and ‘C’ location,” Case said. “They can’t afford it. They’re going to wait for ‘A.’ ”

Sherrod said higher vacancy rates are driven by big-box stores like Circuit City and Linens ’n Things that have gone dark in recent months because of bankruptcies.

“That’s a lot of square footage to get thrown in the market all at once,” Sherrod said. “Vacancy is up, but it’s really tied to some of these bigger spaces.” 

Downtown market
Vacancy rates in downtown Charleston, at about 5%, remain particularly low compared with the rest of the market. That’s likely a major factor behind the push-back tenants there report getting when asking for rent reductions.

The retail vacancy rate on King Street remains low at about 5%. Marketwide, the average retail vacancy rate is about 10%. (Photo/Leslie Halpern)

“Finding the next tenant to take that place may actually not be that difficult,” said Jonathan Oakman, director of business services for the city of Charleston.

Oakman said a recent study of Upper King Street since the fall shows that although 13 businesses have closed, 11 new ones have opened. He did not have a similar count for other parts of King Street.

“There’s a lot of interest in King Street,” Oakman said. “People we know who have vacant properties on King Street are getting all kinds of bites.”

People might think business is worse than it really is on King Street, Oakman said, because some property owners with vacancies are improving their buildings now instead of marketing them. Landlords are positioning themselves to take advantage of a better economy, he said.

But not everyone can afford to wait for better days.

Nese Zinn, owner of Zinn Rug Gallery on Wentworth Street near King Street, started feeling the slowdown a year ago. She invoked a clause in her lease that allowed her to leave with 12 months’ notice and recently relocated to a smaller space in Mount Pleasant.

The move followed staff and salary cuts.

“We’re trying to do everything we can to survive this,” Zinn said.

All told, Zinn said her new rent and the mortgage payments on two condos she uses for rug storage add up to a smaller amount than her downtown rent.

Reach Ashley Fletcher Frampton at 843-849-3129.