Fallout of the continuing recession can be clearly seen driving down Main Street Central Valley California.
You can’t drive several blocks without encountering empty storefronts and unoccupied buildings. Not a pretty sight, especially when you’re a landlord.
According to a recently released University of Pacific economics report, 12 percent of commercial buildings in Stanislaus County are vacant. The figure is a 74 percent hike from the same period in 2007.
Commercial vacancies in San Joaquin and Merced counties were up 59 and 70 percent during the same period, respectively. National commercial vacancies climbed just 14 percent from 2007 to 2009.
Many of the businesses that have survived the economic slump can thank their landlords. Many landlords have reduced rents so tenants can ride out the tough times. The reductions typically range from 10 to 20 percent.
“I think it’s pretty common knowledge most retail landlords are trying to work with their tenants,” said Tim Bettencourt, a partner in Cosol Commercial Real Estate in Modesto.
“Any leases that were written in ’05, ’06, ’07, in that timeframe, they were fairly high compared to current market rents,” said Bettencourt.
Square-foot rental rates during that period ranged from $2.75 for higher-end spaces to $1.75 for a neighborhood shopping center, said Bettencourt. Rate ranges today are now $2.25 and $1.25, respectively.
Bettencourt, whose firm manages several million square feet of shopping centers, estimated 50 percent of his tenants have received a discount in rent.
Ben Sweet of Sweet Properties in Modesto said he’s been working with tenants and discounting leases since the end of 2008. Sweet, who manages a million square feet of commercial property, said tenants with a history and commitment to the property receive the most consideration.
Benefiting from the rent cuts are local small businesses. The larger national and regional businesses typically already have longer and cheaper per-square-foot deals.
“National anchors, their deals are basically breakeven deals to get the center off the ground,” said Bettencourt.
Tenants successful in having their lease payments reduced, said Bettencourt, justify the reduction by presenting profit and loss statements, and documentation of rising costs and sinking sales. “That’s real important to landlords,” he said.
Examining the health of a business allows the landlord to determine if a rent reduction can save a firm or is just prolonging the inevitable.
“There’s certainly some businesses struggling, but how viable is the business,” said Sweet. “Is it a potentially viable business in the future?”
Reducing rents is typically tough on landlords, who also are impacted by the weak economy. “No one is reducing their loans,” said Bettencourt. “It becomes sort of a challenge. You want your tenants to survive.”
When rewriting leases, some landlords discount the rent for a period with provisions to get back the reduction in the later years of the lease contract, when hopefully the economy has improved.
The choice can come down to discounting the rent to keep a center full, or looking for an elusive tenant as a replacement. With so many empty properties available, it’s become a renters’ market.
Mark Seivert, an Ameriprise financial adviser and owner of Seivert and Associates offices in Merced and Turlock, said he had the choice of numerous sites when he was hunting for a new office.
“You don’t have time to see them all, there are so many out there,” he said of the oversupply of office space. “You can be very picky.”