3 Unconventional Ways To Source A Cheaper Rent Deal In Commercial Real Estate

In light of the recent news about Toys “R” Us, I have spoken to many retailers who are looking to take advantage of the opportunity and lease some of the real estate they are currently occupying.

A prevailing opinion in the marketplace is that Toys R Us acquired a plethora of great real estate over the years. Numerous retailers believe attacking the company’s boxes is a great way to land multiple quality locations in a short time frame. However, one must ask, is this an effective way to manage occupancy costs?

Below are three unconventional ways to source a cheaper rent deal when looking for space in commercial real estate. 

LOOK FOR SPACES THAT HAVE BEEN VACANT FOR OVER ONE YEAR

The majority of the public landlords categorize leasing spreads into two distinct categories, Comparable and Non-Comparable leases.  The former are deals for spaces that have been vacant for less than one year while, the latter are dedicated to spaces that have been vacant for longer than one year.

To that end, the ability to grow leasing spreads relies heavily on the Landlord’s ability to grow the rent on spaces that are vacant for less than one year. What does that mean? All else being equal, the spaces that are vacant for less than one year have a different budgeting process, and generally are going to have a higher quoted rent than those that have been vacant for more than one year.

Real estate owners are entrepreneurial in nature and, as a result, most view new vacancy as an opportunity.  Unless there is a capital event that is forcing the hand of a Landlord, the majority of the private Landlords are going to hold out for a premium deal if a space has been vacant for less than a year. A private Landlord is likely to try and uncover every stone for the perfect opportunity.  Both public and non-public landlords are going to have more wiggle room on spaces that are vacant for more than one year. 

I have seen cases where a tenant was adamant about leasing one particular space that was vacant for three months while the space right next door was vacant for 18 months. The difference in quoted rent was approximately 20%. 

Quality of real estate is always important and the supply and demand of real estate certainly dictates pricing. However, there are instances where quality is equal or substantially similar and one space is priced higher than the other merely because of vacancy time.

LOOK FOR “UNIQUE” SPACES

To open locations quickly, maintain brand standard, and have operational efficiency many national retailers look for a box with certain dimensions. Office users sometimes have a prototype size, need something specific, and are required to uphold brand standard. Many industrial tenants that are looking are searching for a clean, right sized box with a required number of loading docks and explicit ceiling height. 

Think about the similarity of the last chain store you visited or all the accounting offices you have seen over the years. No matter where you are, they are all consistent in size, dimensions, etc. There are obviously subtle differences, but they all share a significant number of similar characteristics.

However, there is a great amount of commercial real estate that is unique in size, needs some TLC, or is missing industry standard components. Some of these spaces are unbelievable locations that just need a vision. Since there is less demand for unique spaces, they are usually marketed at a discount compared to those spaces that are traditional. If you can step outside the box, look at the space with vision, and do not mind putting a little TLC into a space, you can oftentimes lock up great real estate at a discount.

PAY A HIGHER YEAR 1 FACE RENT

Over the past few years, I have seen a lot of completed leases, more specifically, those executed by small business owners, where the rent was back-loaded. These Tenants test the waters, wanting to “start out on the right foot,” pushing for up front free rent, and lower year one face rent. The cost to the tenant is usually that the lease has higher percentage increases on the back end. What I find is that the amount discounted in the front of the lease is not equivalent to the amount that is paid in rent on the back end of the lease. Typically, the front-end discounts come at a steep premium on the back end. Usually, the total rent over the term of the lease is more on deals where the rent was back-loaded versus deals that had a consistent rent where there were not heavy discounts on the front end.

In a fragmented commercial real estate landscape if you want to get creative in lowering your real estate costs, you will have to think outside the box. The above three unconventional ways to look at real estate and real estate deals. I hope this helps.