So much vacancy!
I’m sure if you are like most people, when you drive through town, you ask yourself why certain real estate sits vacant.
What’s with that big box that they just can’t seem to get a tenant for? Whether is has sat empty for years or just what seems like years, there is probably a reason that most people just aren’t aware of. It could be as simple as the asking rent is unreasonable, the property shows poorly or the location is undesirable. But if it is your obvious corner or heavily trafficked location, then there is probably more to the story.
When a tenant signs a lease, terms can vary; but that lease document will tell us the specifics behind why that storefront sits dark. Oftentimes when a tenant closes suddenly, without announcement, and then the storefront sits empty for a long period of time following, the tenant is still paying rent to fulfill their lease agreement.
Post closing the tenant may be going through the legal proceedings to terminate their lease early, buying the lease out and coming to some financial agreement to release them from their lease, or not. The landlord must weigh their options to hold them to their lease terms or to terminate and seek a new tenant.
It is often not in the Landlord’s best financial interest to terminate an existing lease because the current terms may be more favorable for them than what the current market will bear at the time of closure.
Sometimes, in a changing or volatile market, it is better for a landlord to hold out for the right tenant, rather than just taking the first offer that comes along. They would rather have a vacancy because once a space is leased, the tenant controls that property, often for many years. If the real estate market changes, they may be stuck with an inferior tenant without the ability to increase their value.
The owner may see the potential to sell the property for redevelopment if the property is in a highly desired location. In this case, the property may have more value if it is not encumbered by long-term (or possibly even short-term) leases.
Leasing space can also be expensive to a Landlord. Tenants often require a specific buildout or they request tenant improvement dollars to build out the space to their requirements. There are also management costs, repair costs and a variety of other expenses in actually having a tenant. Depending on these costs and the financial strength of the owner/landlord, they may be better off leaving the space vacant until the right tenant comes along.
Owners also like to have tenants that have compatible uses. Co-tenancy is often as important as location to many tenants. Tenants require or ask for exclusive use clauses so competing businesses aren’t leased in the same building or shopping center. This creates another barrier in the ability to lease space, which can lead to long empty storefronts.
So, when you get curious about these things because you’re looking in the market for your new space, make sure to call one of your trusted commercial real estate advisors.