While commercial real estate markets are facing unprecedented challenges, demand for retail space isn’t abating. Sellers in multiple industries are seeking space as they prepare for the economy to stabilize and for spending to pick up in the next few years. Demand for office space is down overall, but developers with high-quality office space in an ideal location are seeing an uptick in demand. As supply chain shortages and inflation continue to hamper new construction, demand for commercial space can remain strong even as economic challenges such as a commercial credit crunch and inflation take their toll on the economy. Commercial real estate landlords can expect low vacancy rates and good profits long-term if they understand what potential clients are looking for and how to best meet their needs.
Flexibility is high on the list for many small business owners. Entrepreneurs setting up a new business may want a short-term lease that would enable them to move out early if the location and/or size of the rental space doesn’t meet their long-term needs. Many business owners want a co-tenancy clause that would enable them to leave without paying a fee if a tenant they depend on for foot traffic packs up and leaves. A small business owner may also request a “build-out” provision if the property isn’t move-in ready and/or doesn’t meet his or her exact needs. The “competitor clause” is also common as a business owner will naturally want to avoid having another competitor move in next to his or her business. Cost is also a top concern, as over two-thirds of small business owners are struggling financially. A landlord putting up a commercial property for rent should be prepared for counteroffers.
A commercial landlord or developer will want to weigh common requests carefully and accommodate potential tenants without compromising potential profits. A vacant property can cost a landlord up to $1,750 per month, so keeping tenants long-term is a key to success. To this end, offering a short-term lease option isn’t typically in a property owner’s best interest. However, it can be a profitable move if the space is likely to be in high demand in the future and the small business owner is willing to pay a higher rent than a tenant with a long-term lease. Alternatively, a landlord may want to offer perks to potential tenants who are willing to sign a five or even ten-year lease. These can include lower rent or even free rent for an initial time period. A landlord can also limit perks such as co-tenancy clauses and build-out provisions to companies that are willing to sign a long-term lease. A competitor clause, on the other hand, must be clear and should be limited to direct competitors. A coffee shop, for instance, should not be able to stop a landlord from renting a nearby space to a fast-food joint.
A landlord should also consider the type of lease he or she will offer potential tenants. A triple-net lease is the most common option, and it works well for small business owners and tenants alike. Business owners not only pay rent but also property tax, insurance, and maintenance costs. In return, they receive lower rent and have the freedom of being able to call for maintenance and repair work without having to wait for the property owner to handle these jobs. On the other hand, gross leases and modified gross leases have their advantages. However, a business owner who is hoping to cut costs should understand that rental payments for a gross lease will automatically be higher than for a net lease. Furthermore, the landlord has more control over the premises and may not include all the terms and conditions a business owner may need or desire.
Developers and investors should take advantage of continuing demand for commercial rental space by drawing up terms and conditions favorable to themselves and potential tenants alike. Small business owners look not just at location but also cost and flexibility when choosing a commercial venue. Landlords can maximize profits while meeting small business owner needs by including flexible terms and conditions in a contract and offering helpful perks to meet a business owner’s needs and requirements.
Have questions?
Peak Commercial is committed to providing you with the latest and most up-to-date information affecting you and your commercial real estate investment portfolio. Contact one of our expert commercial real estate brokers or team members today to learn more.
(818) 836-6717
