It's the Walmart story all over again. Sorry, I prefer to buy my sheet from the Death Star.
Retail Space Is Going Fast and Pushing Out Local Shops
Small businesses struggle to compete with national chains as rents rise
By Kate King
Oct. 21, 2024 9:00 pm ET
When the lease for Alex Macias’ furniture store in Mesa, Ariz., came up for renewal in 2021, his landlord asked for twice the current rent.
“In hindsight, they were saying, ‘Well, this is what a national tenant will pay. Can you pay that?’ ” Macias said.
Macias balked at the higher cost and closed the store. His landlord replaced it with Five Below, a national discount chain that has been expanding aggressively in recent years and agreed to the higher rent.
A lengthy stretch of scant new construction of retail real estate, combined with demand from expanding retailers, has reduced a longstanding property glut. Retail availability sits near record lows.
Landlords, who struggled for years to fill vacant storefronts, now have the upper hand in rent negotiations.
That is pricing out a lot of small businesses that can’t compete with deep-pocketed national chains for limited store space.
Nearly six in 10 small businesses said their rent had increased over the past six months, and more than half of independent retailers couldn’t pay their September rent in full, according to a survey by the business-networking platform Alignable.
Sarah Bingham, co-owner of vintage clothing store Antique Sugar in downtown Phoenix.
Bingham says her landlord recently offered to buy her out of her lease, but there was nowhere to go.
Everything else equal, property owners like the idea of renting to independent shops and restaurants. These businesses generate loyal local followings and help differentiate their properties from online offerings.
But the prospect of higher rent is hard to resist.
“A lot of it ties back to valuation,” said Conor Flynn, chief executive of the publicly traded shopping-center company Kimco. “You do need to have a credit-worthy tenant base to make your asset more valuable.”
Rising rent prices come on top of other small-business hardships, such as the struggle to retain good employees and secure affordable business loans.
Early on in the pandemic, some business owners were able to negotiate lower rents as the future of in-person shopping and crowded cities was still in doubt.
Ken Giddon was one of them. The co-owner of the small menswear chain Rothmans had a personal guarantee and seven years left on the lease for his Manhattan store—paying more than $1 million in annual rent—when the pandemic hit.
After a short-term “Covid survival deal” with his landlord and forfeiting his security deposit, Giddon secured a long-term agreement two years ago and is now paying a lower base rent than he did in 2019.
“It actually worked out very well,” he said. “But it was scary.”
Many independent retailers weren’t so lucky. Months of business closures in early 2020 followed by a slow return to in-person shopping and dining in some places sapped the often meager savings of mom-and-pop shops.
Emergency government loans such as the Paycheck Protection Program provided some relief but couldn’t save everyone. In the years since, rising labor and supply costs as well as inflated food prices have further weighed on bottom lines.
A Del Sol Furniture store in Phoenix.
Bigger retail chains, meanwhile, were able to more easily access the lines of credit needed to stay afloat.
Kimco, which owns more than 560 open-air shopping centers across the U.S., previously operated an incubator program called “Keys” that allowed new businesses and entrepreneurs to move into vacant storefronts with a year of free rent.
Now, with strong demand from expanding retailers driving Kimco’s occupancy to record highs, that time of free rent is over. National and regional tenants now make up 81% of its portfolio.
But Flynn, the CEO, still wants independent shops and restaurants, the kinds of businesses that sponsor local youth sports teams and connect with the community. Kimco led a recent investment in the fintech Bonside’s emerging-business fund. The firm gives financing to bricks-and-mortar businesses that are looking to expand. It is repaid through percentage-of-sales arrangements.
Phoenix has experienced some of the nation’s biggest rent increases this year. Prices there rose 7.4% in the second quarter compared with the same period in 2023, according to real-estate firm JLL.
Landlord Chuckie Duff is loath to replace popular tenants who can’t afford increases to market rate.
Macias, the furniture-store owner, was able to solve his rising-rent problem by reopening in a building that he purchased.
His former landlord, Joshua Simon of SimonCRE, said the furniture store had been paying below-market rent.
For many of the city’s small businesses, developing a close relationship with the local landlord is crucial to survival. Sarah Bingham, co-owner of the vintage clothing store Antique Sugar in downtown Phoenix, said her landlord recently offered to buy her out of her lease so a restaurant he was an investor in could take her space.
“The offer was very generous, but we looked around and there was nowhere to go,” said Bingham.
Her landlord, Chuckie Duff, said the rents for his nearly two dozen retail tenants have roughly doubled over the past decade. But he is loath to replace popular tenants who can’t afford increases to market rate.
“I don’t ever want to be the guy who kicked out a place that people love,” he said.
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