Shifting Dynamics in retail Real Estate Create Opportunities for Small Businesses, But Challenges Remain
The retail landscape is undergoing notable changes, creating a complex environment for both landlords and potential tenants. While large shopping centers once prioritized securing “credit tenants” – stable chains willing to commit to long-term leases - a shift is occurring, possibly opening doors for smaller businesses, though not without hurdles.
According to retail expert Joshua Norman, some shopping centre owners are strategically allowing vacancies to accumulate, notably if their long-term plan involves selling the property. This approach prioritizes a clean slate for potential buyers over immediate rental income. the pursuit of credit tenants, typically those offering six months’ rent upfront on 5-7 year leases, is becoming more difficult, creating a potential opening for smaller businesses to negotiate more favorable terms.
Though, landlords face considerable risk when considering smaller tenants. A key concern is lease duration, as Norman points out, questioning whether a “Mom and Pop” shop will commit to a lengthy agreement.
The viability of these opportunities is heavily influenced by location.Andrew Spatz, a commercial real estate attorney in New York City, notes that the market around New York City is trending against better deals for small businesses. Increased demand for warehousing and distribution space has actually increased the value of vacant retail properties.
Conversely, in areas where big-box stores have closed and data centers haven’t absorbed the available space, opportunities are emerging. Spatz emphasizes that these opportunities are contingent on landlords offering manageable lease terms, specifically avoiding ”triple net” leases, which require tenants to cover property taxes, insurance, and maintainance in addition to rent.
In Des Moines, Iowa, real estate broker Jacob Naig reports a more favorable climate for small businesses. He cites a recent example of a family-owned restaurant securing a location previously occupied by a chain pizzeria at a rent 30% below the original asking price, with the landlord even providing funds for kitchen renovations – a deal unlikely just five years ago.
Despite these positive developments, the inherent risk of small business failure remains a significant concern for landlords. Glenn Brill, a managing director at FTI Consulting, points out that over 50% of small businesses fail within six years. This risk often leads landlords to prefer waiting for a strong tenant willing to pay full market rates rather than accepting a potentially short-lived small business at a reduced rate.
Brill suggests that smaller strip centers, rather than large “big box” locations, offer more realistic opportunities for small businesses. Though, even in these settings, success depends on strong local economic conditions. Reduced rental rates alone may not be enough to incentivize a small retail business to open if the surrounding economy is struggling.
