What is the most important thing that people looking to open a franchise or start their own business should know about commercial real estate?
It is really important to have a broker. Not a residential broker – not a friend of yours who wants dabble in commercial. You need somebody who really knows and understands the lingo, where the market is at, what kind of concessions to ask landlords for, and the typical pit falls. I’ve seen leases for franchisees that are going up to renewals that are really bad leases. These leases are very pro-landlord with a lot of teeth in there for the tenant. Professional representation is so important.
Always get your lease reviewed by an attorney. If you’ve never signed a commercial lease before, this is not the time to be a do it yourselfer to save yourself a few bucks.
The beautiful thing about being a franchisee who’s looking to open space, is that a commercial real estate broker will cost you nothing. They get compensated by the landlord for bringing a qualified tenant that they accept. I don’t know why anyone would NOT accept free help from a professional. But I do see it out there, and I think it’s because there are franchisees who are nervous to sign a franchise agreement and buy a franchise without knowing exactly where they’re going to go and exactly how much the rent is going to be.
That means they might go out on the weekend to look for space and start making calls to landlords. But that is ABSOLUTELY the wrong thing to do. You should never contact a landlord’s broker directly – because they are trained to ask questions that sound like innocent conversation but they’re actually sizing you up. You’re undermining your ability to negotiate the space. Plus, if you don’t have professional representation, they might not take you very seriously or they might try to capture you as a their own client.
When you are represented by the landlord’s broker and not your own tenant broker, that’s a total conflict of interest, in my opinion. If that broker represents the landlord, that broker is definitely not representing your best interests.
If you try to bring in your own broker after you’ve already contacted the landlord’s broker and they’ve shown you the space, they will not pay a fee to a tenant broker. Basically, because the landlord’s broker already showed you the space, that broker will claim both sides of the commission.
It’s never ever a scenario of you being able to say, “I didn’t have a broker, so I should get a discount.” That’s not how listing agreements are written. Listing agreements between landlord-brokers and landlords are written to say, “If I bring in an unattached tenant, I get double commission.” There is no way around that. You aren’t going to get a discount, you are going to get a worse deal, and you’re going to get a lease that is pro-landlord.
That is my #1 piece of advice: you have to go on a bit of faith because you’re usually going to have to sign a franchise agreement before a broker will start working for you. I know sometimes that feels like a leap of faith, but we’ve always found good space, good deals, and very fair leases that aren’t pro-landlord for our franchisee clients. I can’t emphasize enough how crucial it is to have your own professional representation.
What’s happening right now in the world of commercial real estate for those looking to open a franchise or start their own small business?
The hardest hit part of commercial real estate is retail, but we’re already starting to see it come back. I was doing about one or two retail deals a week pre-pandemic. But after the pandemic hit, I only did three retail deals through the rest of 2020. Retail basically fell off a cliff.
What’s been surprising, is that while a lot of industrial landlords (who own shopping or big retail centers) are showing motivation to get deals done, they aren’t offering quite the deals you’d expect they would. This could be due to PPP loans and other financial aid.
So, what we are seeing is an increase in concessions, moreso than a big drop in rates. Rates may have come down a few dollars, but they didn’t get cut in half. What we’re seeing is landlords giving more rent abatement than they were pre-pandemic. Pre-pandemic, the economy was doing really great, and it was a fairly competitive market. Landlords weren’t giving much free rent, and they weren’t giving very many tenant improvement [TI] dollars unless it was new construction.
Note: We asked Jill to explain tenant improvement dollars, and she said: “When you go into a new space and sign a lease, you always need to do some construction. If you’re a hair salon, you’ve got to put in the chairs for washing hair, if you’re a gym, you have to put in all the fitness equipment. Every space has to be retrofitted for every new tenant. These costs can range from $20k to upwards of $300k in some cases.”
The landlord will give you money to go towards these buildouts, especially when you’re adding features that improve the property (like bathrooms), things that will stay in the space. Sometimes it’s also called tenant allowance.
Now we’re seeing more free rent and TI dollars, but mostly more free rent. I think there’s some confidence that’s been restored in the market, and landlords just aren’t willing to do to go rock-bottom pricing for a 5- to 10-year term. Pricing that low can devalue their asset, and they just aren’t willing to do that.
What other industries have you seen affected because of the COVID-19 pandemic?
Franchises typically fall into three verticals of the commercial real estate world. Retail, industrial, and office. And usually, in that order – most franchise concepts end up in retail space, then industrial, then office type space.
Offices saw a really big shift through the pandemic, because of the work remote situation. We’ve seen a very big increase in the number of subleases on the market.
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These subleases are where the deals are to be had. In a sublease, you’re not always going to get concessions such as TI dollars and rent abatement, but you’ll usually be able to get great, really low rent. As long as the space can meet the needs that you have in an office, I think now is a great time to try and get the rewards from a sublease like those low rates.
Do you get the sense from landlords that they’re expecting a return to full office work?
I do. There are definitely office real estate brokers who remain really optimistic that everyone is going to return to the office place. They have a different perspective from mine.
I’m not seeing a full return to office work, and I don’t think it’s going to be the case in the future. I think there will be a return to work, for sure. I think there some people who need or want that synergy that comes from working in an office. But I think that many businesses are seeing the benefits to their bottom line of not having to pay the overhead of office, and they’re willing to give up some of that synergy that comes from being in an office. Everyone’s getting used to Zoom and these other platforms now, and yes, Zoom fatigue is a real thing. But again, I think the benefits to the bottom line of not having office overhead are outweighing those things. I think we’re going to see a fair amount that continue to work remotely, and yes, there will be some who return, but I do think it’s a shift in the marketplace for sure.
It’s going to be more gradual – retail fell off a cliff but now it’s bouncing back, but office has slowed down and has a lot more sublease space on the market. Until a lot of those open subleases are absorbed, there’s not going to be many people who will do the direct deal with the landlord rather than do the sublease – at least that’s my opinion and what I’m seeing.
It’s really great that the shift in the commercial office real estate market helps give such good opportunities to franchises and small businesses who are looking to take advantage of the availability of office space subleases. Can you also talk about the industrial market?
The industrial market has been the most unique thing to watch throughout the pandemic. Industrial has always kind of been commercial real estate’s steady-eddy. For the most part, whatever upticks and downticks you see in the economy, those peaks and valleys, industrial has those softened or cut off. Industrial has just always been very steady.
But with the pandemic, industrial has just gone wild. It is so hot right now. It’s because with everyone having gone remote, wanting everything delivered, not wanting to go out, or just deciding it’s easier to get everything delivered to their front door, there’s just been such a massive shift to that type of acquirement.
Additionally, a lot of industrial users were deemed essential businesses, whether it was construction or manufacturing, so those businesses remained open. And those businesses remained busy. The desire and demand for industrial space is up EVERYWHERE in the country. For the last year, like I mentioned, my retail slowed down dramatically, but my industrial business climbed. I did a lot of industrial deals through 2020. I think that trend is going to continue. I’m still getting a lot of assignments from franchisors for industrial users who need industrial or flex space.
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It’s the most competitive market I’ve ever seen in industrial. We just cannot find space in some areas because there’s nothing available. Vacancies are only 1.5 percent in many markets, so sometimes we just have to sit around and wait for three to six months for something to become available in those superhot markets that fits the size we need.
The funny thing is there seems to be a lot of tiny spaces, the like one to two thousand square feet spaces or the very big spaces, but the middle size (10,000 square feet and under), that’s what’s getting gobbled up, and what’s really hard to find.
Do you have any tips for someone who might be looking for that ‘middle size’ can do?
Wait. You have to be patient. I know that’s a hard thing to say. When you’re ready to get your business started, you want your space yesterday. I understand that – I’ve had three franchises myself, so I get it.
I always tell people “Be careful about what you compromise on.” Sometimes you have to make compromises, but I think you should never compromise on is your budget, the space’s suitability, and its location.
We always tell our clients that we’re not going to put them in a suboptimal location just because that’s all that’s on the market. It’s better to wait a few months until the right space is available. And it’s hard to wait – sometimes a month or three passes by and you just think, “I just need to take whatever I can get!”
I don’t prescribe to that school of thought. This a 5-year lease. This is a big commitment for your business. You just have to be cautious and patient.
A huge thanks to Jill Ames for taking the time to talk to us and provide valuable information for franchise and small business owners looking to get their own space. Ready to use these tips to get your franchise or small business going? Guidant is here to help you get the money you need. Call us at 888-472-4455 or contact us online to talk with one of our financing experts to learn more.