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Churn and Burn

by Jordan Walker

Posted on June 22, 2022

Finding the right space in a competitive market

At a time when the commercial real estate market is extremely hot and highly competitive, there are actually a relatively large number of spaces available. The key to understanding the current market moment is recognizing that the disparity between coveted premium spaces and everywhere else has never been wider—and the implications for brokers, landlords, and tenants more significant.

What does it mean to be looking for opportunities in today’s unique market moment? What factors are driving decision-making on both sides of the leasing equation, and what options are available for those who know how (and where) to look?

Fast and furious

In the most desirable commercial real estate areas, there is almost no space available. Tenants are fighting over spaces that had been sitting vacant not long ago, and virtually every quality space has three or four LOIs working. In contrast, secondary spaces in less desirable neighborhoods or in over-retailed areas are generating little to no interest—and many downtown districts are also hurting. The result is a market where perception is lagging somewhat behind demand. There are some valuable opportunities for generational real estate, but because they aren’t being marketed very widely or to the general public, you need to have a broker and you need to move quickly. You also need to be flexible and willing to come in at full asking rent (and with no tenant improvement demands) to secure the best properties.

Landlord priorities  

One important piece of the puzzle is the fact that landlords are looking for more security right now. Having endured eviction moratoriums and COVID concessions, they are seizing the moment and capitalizing on the momentum of a surging market to look for dependable tenants with great credit. Many aren’t hesitating to execute options to terminate if they feel like they can get a better deal elsewhere. For the most part, they are getting those deals, but they still need to be deal-makers and realists: even the best corner in the best market will remain vacant if the asking price is out of whack with market realities. While co-tenancy considerations are still on the table, more landlords are simply picking the highest rent with the best credit. The best brokers are keenly attuned to the priorities and perspectives of individual landlords and can help retailers make informed decisions about the best way to approach promising opportunities.

Room for improvements?

When it comes to tenant improvement considerations, there are competing influences at play right now. Some landlords are flexible and willing to be more generous, while others see the state of the market and feel like tenant improvement concessions simply aren’t necessary when so many tenants are fighting for good spaces. With construction costs skyrocketing, landlords are generally more likely to offer a check instead of dealing with buildout headaches, but it really depends on the condition of the property and the mindset of the individual landlord. Because construction timelines are lengthening significantly, however, landlords are also putting in leasing language with firm rent commencement dates. They simply cannot afford, either literally or figuratively, to wait the year or more than many of even the most modest construction projects are taking to complete.

Market insights

Given the enormous differences in leasing dynamics and demand from one property to the next, deep and nuanced market knowledge is more important than ever. Successful brokers don’t just know what spaces are valuable and when they are likely to be available, but they understand regional demographics—and how they apply to individual retailers—with an impressive level of granular detail. Depending on traffic flow, the difference even from one side of the same street to the other can be dramatic—and appreciating those subtleties is essential to getting the right space at the right price.

The perception curve

Any time the market shifts so dramatically in a relatively short period of time, there tends to be a bit of a lag time before retailers fully appreciate the new dynamic. There are more than a few retailers looking for space who still view things through a pandemic-tinted lens and bristle at the notion of paying full rent. But the reality is that great deals on great spaces are nonexistent: if you want a premium space, be prepared to pay for it. Which is why, in the frenetic activity of a post-pandemic retail revival, brokers need to be strong communicators and educators, helping landlords make the most of the moment, and helping prospective tenants understand the market and their place in it.