As a commercial realtor who specializes in shopping centers and retail space, I often get e-mails that read something like this:
"Jeffrey, I love your newsletter and websites. I have a client who has a start-up business, is looking for 3500 sq. ft, needs to be near Scottsdale Rd., wants visibility and a great location, and is willing to pay up to $2500 per month. Also, since they are a start-up they want a 6-month lease. What do you think?"
To be honest with you, I used to laugh at these requests. They are "dreamers" looking for space that does not exist. For the most part, they waste a lot of people's time searching for the stars. They have no idea how much it costs to build and maintain a building; let alone how much profit a landlord/developer needs to stay in business. Now, I smile because I have a very simple way of guiding one in their journey to reality.
Whereas there are many homeowners who make mistakes and need to sell in desperation, rarely do I find a commercial property that is in trouble. Usually, the land or building can be salvaged and therefore lease rates tend to be stable. Rarely, do I see a fire sale of a building or landlords giving incentives to lease space. Most property owners prefer to sit on empty space until markets mend. On top of that leasing agents are trained to go for the highest profit in order to set precedent. If you give a special rate to one tenant, you have to give it to them all.
I know one leasing agent who gave a 10-year sweetheart (below market) lease to a governmental agency and is now paying the price since the value of the building (i.e. the net present value of rents) is below market. He can't lower the price to sell the building because a buyer needs to honor the lease in place.
Therefore, I am going to give you an insider's secret to knowing what lease rates are. I call it 1-2-3-4. Although there are thousands of retail properties on the market at any given time, lease rates tend to fall into four groups. Group 1 costs $1/sq ft per month. Group 2 costs $2/ sq ft., per month, and so forth.
So, if you are in category 1 and you need 1000 sq ft. (the average size of a retail store in a mall) you will pay $1000 per month for 3-5 years. The lease term is always negotiable and depends on many factors.
Category 1 is barebones and comes with very little frills. Think of a very old shopping center that has seen its day. It gets mostly local business, has limited resources, probably has roof and parking lot problems and desperately needs a new and refurbished look. They are sometimes located in dangerous areas and may have limited lighting to protect people at night.
When clients want space in these building, I encourage them to work out of their house, save money, invest for the future and use it for space in a better area. Do people always listen to me? No. But, I can tell you that they rarely grow their business to the point of success and sometimes call me to sell their business. Sad!
Category 2 is a nice neighborhood shopping center maintained by a landlord who cares. Most of the time, it is either a family business with children cleaning up the mess in the parking lot of a national chain who can spread their maintenance costs over several buildings in their portfolio. They attract good local businesses and may have a couple of national franchises in key locations. Often, they will have one major attraction, which draws in the public. Although, they do have a grocery store, they will usually have a 24 quick food place or a gas station, which also has coffee and snacks.
Once you get into Category 3 and Category 4 you are getting into real money. Even a 1000 sq. ft store costs $3000 or $4000 per month and must cash flow each month for the business owner to survive. They are in excellent locations and everyone knows where the center is located. Category 3 centers are older and Category 4 is newer and the place to be.
For example, if I say Kierland Mall you know where it is, even if you are from Chicago. If I say Waterfront, you know what I am talking about. If you talk about Barneys, which is coming to town, you do not need to say anything else. Same thing goes for AJs, Bashas, Starbucks, etc. These names draw people like a magnet, thus increasing the rent a property owner can charge.