The hardware store in the local strip mall closed last week. Seems the owner of the mall raised the rent too high for them. Other stores in the mall have had the same thing happen to them. So now the mall is 75% empty. A lot of other shopping malls have empty stores also. If there is more supply than demand shouldn’t rents fall? Also why are they still building new malls when other malls are mostly vacant?
Stubbornness, perhaps? A misguided belief that - contrary to evidence - that if the current businesses won’t pay that much someone else will?
The local “mall” where I grew up fared so poorly that they tore half of it down, converting it to a strip mall with one third the tenants. Cheaper to maintain that way, and the same number of tenants paying the rent they decided to charge.
The other one was damaged in an earthquake, then further damaged during a massive snowfall. In the end it was occupied only by two clothing stores, a barbershop and a Radioshack. The owners decided that it would be cheaper to tear the thing down and sell the lot than repair it. Not really a rent thing in that case, I guess.
A) Maybe because you drop the rent this year and when (say 12 months later) it is time for a rent renewal, the renter asks for another drop!
Landlords can get very stuck in their thinking that their property should be earning $X per month because in some glory days of the location is earned that much. Its almost kind of a diseases - especially when they made their business plans on the idea that the properties would be making that amount per month. So they dig in their heels. Some of what ClevelandProud can hold true as well, or at least the fear of it can.
There is also the problem where landlords fear lowering rents brings in seedier establishments and result in a location stagnation where it never breaks out of newly aquired status and gets back to the good old days.
Another reason for not dropping the rent is the bank. Sometimes a bank will insist on rents be at a mimunm price per sq foot. The company I work with have moved some of their tenants out of the newer building to our building. The newer building has a biger loan against it and the bank insist on a higher rent then will be paid by smaller business. So the new building has a higher vacancy but rents are higher so the bank is happy.:smack:
Is there any kind of tax deduction they can get from leaving it empty? Or is is better to leave it empty and take the loss so it benefits them that way on their taxes?
Most business leases are long term. Owners don’t want to lock themselves in for 30 years at a rate set during a recession. Next year there might not be a recession and keeping a place empty for one year is preferable to losing money for 29 years.
That’s an explanation. The individual circumstances might be different.
could they write a short-term lease and offer it to a store that is willing to take a risk of relocation in exchange for lower recession-time rent?
Could be lots of reasons. First off, who did you hear about the rent being raised from? Often times when a store goes out of business they’ll find other people to blame it on. The rent was raised, the vendors didn’t deliver things on time, the bank messed up the loan etc… Though that’s probably not the case when the entire mall closes up. Other then that, you have to remember, it takes a certain amount of money to maintain the mall, if they lower the rent, they won’t be able to maintain the building (and everything involved with that). If rent is, for example $10,000 a month, it’s possible they would rather have an empty slot (and hope someone fills it soon) then to have a long term lease in there for $4000 which may represent the building manager losing money.
Location Location Location
In Milwaukee there are some malls that are totally abandoned right now because the neighborhood around them got so bad that no one would go there anymore. While other malls are doing very well.
I don’t think location has much to do with it. The mall in question is on a major traffic artery and is adjacent to a nice neighborhood.
It must happen at times, but it’s not a prime strategy. It’s so expensive to move a business that planning for a short term would limit the market. And owners of good properties would probably prefer not to deal with the lower-quality firms that want to go in and out of a location quickly.
Putting in provisions for changing the rent as conditions change, somewhat analogous to a variable-rate mortgage, may be a better alternative but I don’t know how often it’s used. It would probably be difficult to negotiate because of the uncertainties and businesses dislike uncertainty.
Another factor is that there presumably are other malls around that have occupants despite paying similar rents. They may even have the same owner.
Let’s say you own the Westside Mall and it has a capacity for a hundred stores. But you currently only have thirty stores renting in the mall. In an effort to attract more stores, you lower your monthly rental from a thousand dollars a month to five hundred dollars a month. It works and you attract seventy new stores. So even with the lower rent, Westside Mall is now earning you $50,000 a month instead of $30,000.
But you’re also the owner of Eastwood Mall and Northtown Mall, which are identical in size and rent to Westside except that they are fully occupied. So both of these malls are earning you $100,000 a month. But once the stores in these malls hear about how you lowered the Westside rentals they insist on a similar discount. So now these malls are only earning you $50,000 a month.
Overall, you were earning $230,000 a month and now you’re earning $150,000 a month. And your expenses have gone up because now you have a third fully occupied mall instead of a partially occupied one.
We’re talking about businesses in a strip-mall. Local strip-mall type establishments are NOT 30 year leases! These type of leases are typically 5 years. You might be able to negotiate a 3 year lease, but then you’ll pay a higher rent.
30 year lease on a strip-mall property?!
Why didn’t the hardware store drop their prices, in order to increase sales so they could afford the higher rent?
(If they could have, they would have. Perhaps the mall is in the same position.)
Stupid Owner Syndrome.
“I refuse to accept less” ends up meaning “I will be forced to accept zero”
Tripple net leases are normally 1 or more years. If a major TI is required then the lease will be longer depending on the tyoe and amout of the TI.
Yep. It’s the same as with people who insist in selling their house at the price they want, no matter how long it takes: eventually it sells, once their asking price becomes market price; this can take years.
Also, sometimes there are other factors influencing the issue.
One of my uncles is a 5th-generation boutique-chain owner, this chain is a huge fish within its own limited market; his family had been dressing the local upper class for generations before opening that first boutique. Their original store never belonged to them, it was in a rented spot. The previous owner died and his heir decided to raise the rent: the owner did not call the store owners and negotiate, but simply had his lawyer send a letter saying “starting on [this date] your rent will be [this much].” Attempts to negotiate or meet were rejected.
They moved the store.
It’s been more than ten years. There has not been another business in that spot yet. It’s prime real estate, but it will not get filled. I understand there have been people who tried to rent it, but the owner refused to meet with them (this might be ok if he didn’t happen to live in town, but even then, one meeting in person would be expected) and his lawyer has no power to negotiate or clarify terms, this is what the owner wants, this is how he wants it, he will be changing it at any time he wants to and the law allows it.
The store is empty. It’s not just a matter of price, it’s a matter of knowing that whatever conditions get set will be set unilaterally by the owner and that he can’t be relied on for anything other than trying to extract as much from you as he thinks he can. How long will that store be empty? Until he sells it or dies, at a guess. Have I mentioned that it’s prime real estate and he pays prime taxes for it?
Where I live the owner has to pay 40% of the rent as income tax. Then there are municipal taxes, building taxes, cost of repairs, etc.
If you set the rent too low it might just barely cover the other taxes, plus if your tenant starts skipping payments you are still accountable for the 40% of the rent, then you have to go to the courts which means time and money spent.
So from the property owner’s perspective it is better to wait for a good tenant that will pay a higher rent than renting to whoever comes first at a low price.
Because the hardware store has the choice of moving to a different location with lower rent. The landlord can’t move his property to a new location where tenants pay higher rent.
Supply and demand apparently do not apply in commercial real estate.