by Andrew Johnson – Nov. 20, 2008 12:00 AM – The Arizona Republic
Consumers have cut back discretionary spending. Credit is harder to obtain. Energy costs have been on a roller coaster.
Operating a small business has become something of blood sport in the past year.
But an area of the economy where small-business owners are getting breathing room is commercial real estate.
Fundamental factors that turned the Valley into a commercial-development hot zone – rampant in-migration and job growth – have slowed. Leasing and sales velocity in the commercial market has stalled. Vacancy rates for office, retail and industrial properties are at their highest levels in several years.
The news may sound dour, but the ailing market has opened new and, in some cases, classier doors for small businesses. To fill space, landlords offer a bevy of concession packages: several months of free rent, reduced parking rates, money for improvements and greater move-in flexibility.
The specials enable companies in older buildings or less-than-ideal locations to move into Class A space without necessarily paying Class A prices.
The downturn has taken a toll on businesses in all sectors. Many have scaled back hiring or postponed expansion because of skittish consumer demand. Others have gone belly up.
The result is fewer tenants available to fill the growing pool of commercial space. That has delivered a hefty blow to building owners and property managers, who struggle to attract and retain tenants.
Very shallow’ market
“The market’s very shallow right now in terms of activity,” said Don Mudd, a senior vice president in the Phoenix office of commercial-brokerage firm Grubb and Ellis/BRE Commercial LLC.
In addition to the rising number of businesses that are vacating space altogether, many are trying to sublease. Some want to sublease space they don’t need; others are looking for cheaper space elsewhere and can’t prematurely end the contract for their current location.
Subleasing is one way small-business owners can move to a premier location without paying premier prices.
“On the sublease side, there is a significant reduction of (rental) rate,” said Nicole Cooley, a senior associate with Cushman and Wakefield of Arizona Inc. in Phoenix. Cooley works with office tenants seeking 3,000 to 10,000 square feet.
Many tenants are taking advantage of the slow market by “either stepping into Class A space in a better submarket or into a more ideal location for their employee base,” she said.
Lisa Perez, who co-owns a document-shredding business, is subleasing about 500 square feet from an office-furniture company in east Phoenix. She pays about $1,200 on a month-to-month basis.
Other properties she looked at cost $3,800 to $5,000 per month.
“I thought, ‘Gosh, we’re going to burn through cash pretty quickly,’ ” recalled Perez, CEO of AZ Docushred LLC.
Many landlords have become more accommodating to potential tenants as the commercial real-estate market has softened.
When Ultimate Shade Alternatives in Tempe was looking to relocate its office and warehouse last fall, price was important – so was space configuration and move-in time.
The company installs outdoor shades on commercial and residential properties.
The shade materials are as long as 50 feet, so the company requires large swaths of unobstructed space. The business also was growing, making it difficult to pinpoint exactly how much space it needed.
The owners decided to stay put in a multitenant office-warehouse building in Tempe. A deciding factor was a change in the building’s ownership. The new landlord’s offer to let the company move into the space during the course of several months instead of at one time helped seal the deal.
“They allowed us to utilize some of the new space before we even had an agreement, so they really were going out of their way to help us as a business manage our growth,” president Joy Whitfield said.
Tenants often focus on lease rates when they should keep an eye out for other factors that can affect the bottom line, too, said Greg Mayer, a senior associate with CB Richard Ellis in Phoenix.
“There are 40-plus points in an office lease,” said Mayer, who brokers lease agreements for office tenants. “Most people focus on rent as being the biggest point in a lease, (but) you have parking, you have operating expenses, you have insurance, you have remedies if something happens in a building.”
Despite plentiful deals, other tenants are making do with what they have.
Earlier this year, John Beck was considering moving his office equipment firm, WORKspaces LLC, into a new building because the business could use more space.
The company had moved from a 1,000-square-foot Camelback Corridor office into a 4,000-square-foot multitenant building in northeast Phoenix two years ago.
“We were growing like crazy,” Beck said. “We had too many people stuffed into a small office.”
The company’s office is starting to get crowded again, but the economic downturn has Beck putting potential moving plans on the back burner.
The company could financially afford to take on a couple of thousand more square feet, especially with the some of the deals landlords are offering, he said. Still, the office-furniture business is particularly susceptible to economic downturns, and Beck doesn’t want to risk having to pay for more space than he’s going to need.
In many cases, it’s more difficult for businesses to add locations or relocate headquarters because of financing issues.
“With the tight credit markets, it’s really difficult, if not impossible, for companies to borrow on a business line of credit or (obtain) business loans,” said Thad Seligman, president of the Phoenix office for commercial brokerage firm NAI Horizon.
For some businesses, the only option is to dip into cash reserves.
“The problem is there’s so much unknown about what’s going on in the business environment that no one wants to spend their own cash,” Seligman said.