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Surviving Rent Pressures: Work with Your Landlord, or Pull the Plug? By Tracy Allen THE YEARS BETWEEN 2008 and 2012 were very good to U.S. retailers. Rents were low, due to the biggest selection of space and the most amenable landlords that had been seen since the early 1990s. In 2009, nationwide vacancy for retail space reached 9.5 percent, according to Robert Bach, chief economist at Grubb & Ellis, a California-based commercial real-estate services and investment company. This resulted not just in lower rents, but months of free rent just for signing the lease, and sometimes extra time or reduced costs to build out the space. Today, however, the story is quite different. If you're coming up on a rent-review phase in your lease agreement, you may be shocked by the offer you get for the privilege of remain- ing in your location. You can expect to pay more for your lease if you negotiated low rent during the recession. Don't panic just yet. If you prepare for the negotiation, you could end up in good shape. Or maybe even in a location that better suits your long-term vision. On his blog, www.jimseven.com, James Hoffmann calls the phe- nomenon "something of a cruel joke" on cafés that opened years ago in underdeveloped neighborhoods and took substantial risks to establish a customer base in these uncharted territories. Now, they may see themselves priced out of their leases as the infl ux of expendable income—the same cash fl ow that their own businesses helped attract—comes to the attention of a plethora of chains, be they Lululemon or Jamba Juice, and even regional outlets as seem- ingly random as bakery chains or boutique optometrists, and not just Starbucks or Peet's, that can afford higher rents. On average, U.S. retail-rental rate increases have been moderate. During 2014, rents expanded by about 2 percent, or roughly the rate of infl ation, according to real-estate data company Reis Inc. How- ever, retailers in urban markets like Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, D.C., are facing sticker shock. So are folks in smaller but ever-growing markets such as Portland, Ore., at 7.2 percent, and my own backyard, Kansas City, Mo., at 5 percent per year the past two years. Highly desirable locations are seeing the biggest jumps, while av- erage and below-average retail spaces are seeing modest increases. According to real-estate services fi rm Cushman & Wakefi eld, even though the overall retail vacancy rate across the U.S. is about 8 percent, vacancies in premium spaces are below 5 percent. Last year, Robert Maynard, CEO and cofounder of the Famous Toastery restaurant franchise, told www.franchisetimes.com that "rents really depend on where you are. But landlords are feeling stronger these days, and they are fl exing their muscles." Up, up, and away "For the retailers that signed leases at the bottom of the market during the recession, it's going to be painful for them to renew in place," says Robert Cohen, vice chairman of national tenant repre- sentation fi rm RKF. "It's going to be a bitter pill, and they may not be able to swallow it." "Our biggest challenge … is just fi nding good space," says Nick Hernandez, managing director at Transwestern in Houston. What is considered "Class A" space is particularly hard to fi nd, resulting in rents soaring as much as 30 percent over the past few years. How much further can retail rents rise? Can landlords continue the increases without tenants fi ghting back or walking away? Negotiating your new lease in a tougher market To hold on to your current location or fi nd a new one in a competi- tive market, consider hiring a broker. They can make a big differ- ence in negotiating terms on new leases and lease renewals because they know the market, and they may have insight into current rents, which tenants are entering or exiting a retail development, and what motivates certain landlords. The keys to lease negotiation: • Start well in advance. • Know your assets. • Act quickly. $20 $19 $18 $17 $16 $15 2006 2007 Urban Rent Rents at urban retail properties, which tended to be lower than the national average before the recession, have been posting much stronger growth in its aftermath. National Rent 2008 2009 2010 2011 2012 2013 2014 2015 Continued on page 110 108 barista magazine