No Vacancy

LEASE IS MORE: DEALS TO BE HAD

It's a tenant's market for those searching for retail space

Hadley Reisig started Boutique of Couture, a women's clothing shop, on a shoestring budget in November.

So she was happy to get a good deal on a temporary lease at Harper Hill Commons shopping center at Country Club and Peace Haven roads from her landlord, Developers Diversified Realty.

"I really wasn't sure if I could make it a go in this economy so I signed a lease that gives me a month-to-month option," she said.

Reisig, who worked in marketing and engineering before becoming a stay-at-home mom, entered the retail business at a time when the retail- and office-leasing market favors tenants, according to many commercial-real-estate agents in Winston-Salem.

"It's definitely a tenant's market right now," said Chris Ramm, the owner of Ramm Commercial Properties.

Ramm said that the leasing market is picking up a bit, but that landlords in the local market are still getting pretty aggressive with lease rates and in some cases offering free rent for a few months because of the tough economy.

"There are a lot more concessions than we typically see," he said.

Michael S. Clapp & Associates provides surveys on the Winston-Salem area office and shopping-center markets.

The most recent shopping-center survey, released in October, showed significant vacancies in local tenant shop space. The vacancy rate for nonanchor stores in mostly neighborhood and community centers increased to 20.5 percent in October 2009, up from 18.4 percent in April 2009. The average asking rents per square foot fell to $13.47 in October, compared with $13.66 in April.

A January survey of 63 office buildings found that overall asking rents per square foot decreased 6 cents to $16.73 in January, compared with $16.79 a square foot in July 2009.

The survey just reports asking rents, but Michael Clapp of Clapp & Associates says he believes that actual rents have declined more than the asking rents.

"It's pretty common knowledge you can get a rent less than the asking rent," Clapp said.

Overall vacancy declined to 19.8 percent in January, compared with 22 percent in July 2009, according to the office survey.

The vacancy rate in the Class A market increased to 15.6 percent in January from 14 percent in July 2009. The vacancy rate in the Class B market, typically older office space, dropped to 23.9 percent in January, compared with 29.7 percent in July 2009.

Philip Stewart, the owner of Stewart Realty, recently put up a sign at Jonestown Plaza on Jonestown Road that advertised free rent for three months for several available spots on the top floor to attract tenants.

Stewart said that a lot of office and retail tenants are moving from 10,000 square feet to 5,000 or 6,000 square feet.

"They don't need the space," he said.

Other tenants are moving to more cost-effective space. For example, they are opting for Class B rather than Class A space, Stewart said.

Michael Clapp said that some tenants are shopping around to get better deals.

"If a tenant has a lease renewal in the next year or so they're really working hard to get a lower rate, particularly if that rate was made three, four or five years ago," he said.

Some shopping centers are getting creative in their efforts to lease vacant space.

For example, The Trunk Show recently opened in Towers shopping center on Stratford Road. The retail space is available for small businesses and small vendors to hold such shopping events as trunk shows and home shows.

"I fixed up the space that used to be Celtic Cafe," said Troy Lee Wright, an owner of Towers. "It's beautiful now. It's just so bright and has three enormous windows."

Naturally, the stronger properties in the area are affected the least by a soft market, said Ray Collins, the president of Collins Commercial Properties Inc.

"The declining lease rates primarily impact either newer centers that have yet to stabilize and reach 95 percent or higher occupancy, or older, weaker properties, which typically suffer anything from perhaps less interest or lower lease rates," Collins said.

Weaker properties really have to work hard to attract tenants.

Collins said that the financial strength and staying power of landlords also affect lease rates.

The strong landlords can wait out the market a bit, having the option to say "no" to tenants who keep requesting lower rates.

They also have the flexibility to cut deals to land attractive tenants that could be magnets for other tenants to shopping centers, Collins said.

Not every agent is sure that the current leasing market favors tenants more than landlords.

"Most tenants I'm representing don't really have the tone of it being a tenant's market," said Aubrey Linville, a commercial broker for Meridian Realty Group Inc. "They don't have that vulture attitude of ‘I'm going to get what I want.' Most of them are fairly realistic and reasonable on their requests."

Linville believes that the recession is nearing its end and should result in more office space being absorbed in the next six months to a year, which should help lower vacancy rates.

But some folks in the industry do not expect a lot of improvement any time soon.

Paul Carter of Michael Clapp & Associates said he expects rents on retail space to remain soft and landlords to keep making concessions until the market starts to strengthen.

Clapp said that unemployment is still going to be a big problem nationally the next 12 to 24 months, which will affect the local market.

"So there is not likely to be a lot of job growth that would foster a demand for office space," he said. "In fact, the opposite is probably going to occur and we'll see some contraction."

fdaniel@wsjournal.com
727-7366