Crunching Numbers

Today's economy is causing commercial real estate rents and sales prices to plummet. Is now the right time to move or expand your business?

By Erinn Morgan

While the current retail economy is anything but in a growth mode, now may actually be the best time to secure a new lease.

"From a real estate perspective, it's a good time," says Bob Bach, chief economist at Grub & Ellis, one of the world's largest international commercial real estate service companies. "It's always best to sign a lease when the economy is at its weakest. Landlords should be more willing to negotiate."

TRICKLE DOWN EFFECT

The slowdown in retail sales, caused in large part by fallout from the consumer credit crunch and concerns about an impending recession, is trickling down to affect retailers' (especially chain stores') growth plans—and, thus, the commercial real estate market.

"Retail sales have been down and many retailers are rethinking their expansion strategies," says David Bodamer, editor-in-chief of Retail Traffic, a magazine focused on the relationship between retailing, real estate, and development. "There is less demand, so rents won't be going up as much as in the last few years. But while things are slowing down, they're not quite tanking yet."

Rents have been going up steadily in the last several years, with increases ranging from 5.4 percent for urban centers to 7.2 percent for suburban areas, according to Grub & Ellis market reports.

"The typical 2007 asking rent for inline shop space—a smaller space next to a power center or grocery store—was $28.02 per square foot per year," says Bach. This number is "triple net," the tenants pay their own expenses. "Urban rents in or near downtown areas averaged about $75.75 in North America."

With rents at a high and retail sales low, it is no surprise that vacancy rates have been creeping up gradually. "The rate for anchored grocery centers at year-end was 6.9 percent for the nation," says Bach. Comparably, the rate was 6.8 percent in 2006, and 6.6 percent in 2005.

Commercial real estate sales are also affected in the current downturn. "Sales volumes are down 50 percent year to year," says Bodamer. "People that don't rely on debt are the ones buying right now."

Bodamer notes that sales prices are down, too. In 2007, according to Grub & Ellis, pad site prices for one-acre sites suitable for a bank or restaurant were an average of $29.56 per square foot per sale.

Optical Real Estate Cleinman Performance Partners, Inc., a business consulting firm specializing in larger optometry practices, conducted a Space Utilization Survey in 2005 among its own client base of optometric practices in 23 U.S. states and Canada. Important findings include: ■ Location plays a strong role in practice performance. Among the various types of locations, business district offices had the highest revenues and largest facilities along with the highest costs per square foot. ■ Professional condo locations also have a performance edge, with the highest revenue per square foot, while having below-average occupancy costs. ■ The survey found that the largest number of respondents (67.2 percent) practice in suburban areas; they also generate the highest revenue per square foot ($301.70). Rural locations had the lowest revenue per square foot ($243.20) and urban practices fell in the middle ($289.20). Source for data: Cleinman Performance Partners Space Utilization Survey, 2005

MAKING MOVES

Taking all market factors into account is the best way to determine the right time to move or expand your business. While today's commercial real estate has slowed, it has certainly not hit rock bottom…yet.

"If you talk to brokers around the country, they'll agree that it's not like the market has had a full-on fallout," says Bach. "In 2008, we see slower leasing activities and retailers closing. It [is] a more difficult year than 2007. If we do dip into a recession, then things could get a lot worse." EB