Rising Rents Impacts Business Decisions

A recent article in the Orange County Register http://ow.ly/KztX30dVNOG highlighted several restaurants in OC that are closing. Statements by the owners of the eateries cited that the lease was coming up for renewal and they simply decided to close rather than renew.

This certainly brings up several issues as to why a successful location would close after years of profitability. Yes, one restaurant did file for a Chapter 7 bankruptcy and likely closed before the lease terminated but what about the others?

At IN/House, we do not typically handle restaurant transactions. However, the issue of increased rates for leasing space applies to our office/industrial clients as well. Across the board the reaction is the same that landlords are raising rents to such a high level that it has become a struggle to stay profitable and keep the doors open.

With landlords looking to recover from lower (we refer to it as “more realistic”) recessionary period rents, they are raising rents on renewals to many tenants by as much as 50%. This leaves tenants flailing in search of locations where they can do business while keeping occupancy costs under 10% of the firm’s gross revenues.

The good news is that we are starting to see rents leveling off in our local Orange County, CA market. While landlords are trying to preserve their asking (coupon) rates they are offering many concessions that don’t show up on the Lease Summary page. These concessions may include rent abatements, higher tenant improvement allowances convertible to either rent abatement or even furniture and cabling. Parking has become an issue as well with many dropping the parking rates or providing free parking for a period of time. In one recent transaction, a landlord offered to eliminate all building operating expenses (a great topic for a future Tenant Tactics blog post) for the Term.

Too often we see tenants focus simply on the per square foot rate. Rather, they should look at all of the concessions and free amenities provided at no cost and compare the potential costs attached to those concessions to other properties that might have a fee for similar amenities such as the use of the building’s fitness center or free use of a conference room as well as the cost of the concessions noted above.

We have seen tenant’s knee jerk reactions when learning what a landlord is asking for in a renewal rate. Many tenants, at this stage, want to examine other properties. But frequently, when tenants do consider market options and add in moving costs and the inconvenience of business disruption, that higher rent along with potential concessions from the existing landlord may make the overall occupancy cost more palatable. With that analysis, many tenants simply make the decision to renew their lease.

While evaluating your leasing options, be sure your focus is on the total occupancy cost and not simply the base rent. It will make your business more profitable.