As we head into the end of the third quarter, the current economic climate has presented unique challenges for retailers, particularly when it comes to the balance between business performance and commercial rents. While demand in the sector has been strong, the combination of high interest rates and reduced construction loan availability have resulted in historically low retail construction starts.
With increasing demand and available space being at its lowest level in two decades, many retailers are experiencing the same predicament: Their sales are down, but rents are rising. Amidst economic uncertainty, how can retailers protect themselves?
Take for example, a recent conversation I had with a furniture retailer. His landlord had notified him of a 20% rent increase, despite his business grappling with a 20% drop in sales. Faced with this situation, maintaining profitability seemed impossible.
This retailer’s frustration echoes a widespread sentiment among businesses that find themselves in a similar bind. As the market dynamics shift and uncertainties abound, it’s crucial for retailers to arm themselves with strategies to navigate rent increases while safeguarding their operations.
The first step is to review the lease agreements to determine when the lease term is set to expire and what options for renewal are available. Understanding the terms of a lease is the first step towards proactive management. Exhausting all possibilities to renew before the lease expiration is crucial. In conjunction with fully understanding your lease, early preparation is key. Start planning for lease negotiations about a year before your lease term concludes. This will provide ample time to explore alternatives and position yourself strategically.
Next, prepare for negotiations. To prepare, research current market rents to gauge whether an increase is aligned with industry standards. Simultaneously, scout for alternative locations that might offer more favorable terms.
Research and being prepared with options, empower you with the data needed to negotiate effectively. Don’t shy away from initiating conversations with the landlord. Express your concerns regarding a proposed rent hike and present any relevant market data and your own business performance.
Initiating early renewal discussions might lead to a mutually beneficial decision.
Ben Haverty has more than 30 years of experience as an executive and entrepreneur in the furniture industry, operating retail stores, home delivery warehouses and regional distribution facilities. As the lead of Colliers Furniture Industry Service Team, he works with Colliers integrated real estate services to provide comprehensive solutions for every stage of the furniture industry supply chain.
See also: Navigating the new norms: U.S. furniture retail’s mid-2023 evolution | Ben Haverty