Retail rents rising with construction costs

Commercial real estate agent Paul Land of Plaza Realty has his work cut out for him.

Rents have risen significantly in Columbia, largely because of escalating construction costs, but there also is a higher percentage of vacant space and not much of an increase in overall demand.

“Landlords want high rents because the cost of finishing is high,” Land said. “Tenants want low rent. Something will have to change. You can’t justify higher rents solely on increased costs. It all comes down to what the market will bear.” In the end, he added, “the market sorts it out.”

The successful property owners are those who both are realistic about the market and are savvy negotiators, Land said.

As the CBT map of Columbia’s retail centers on pages 20–21 illustrates, new space is spreading in all directions. The latest is Forum Development Group’s project at U.S. 63 and Gans Road, The Village of Discovery Ridge.

Columbia’s Regional Economic Development Inc. (REDI) lists the general rental costs of Class A space in Columbia as $16-$20 per square foot, but there are numerous exceptions.

Who pays the highest rent?

It’s largely tied to traffic, or the number of people who pass by a place of business every day. When it comes to foot traffic, nobody beats the Columbia Mall. That’s why a game called Columbiapoly would have Victoria’s Secret, The Gap, Helzberg Diamonds and adjacent stores in the highest-rent blue spots, according to an informal survey of commercial Realtors and developers.

Monthly retail rents in the main corridor of the mall between the skylights can go for $70 to $80 a square foot, plus occupancy charges averaging about $17 per square foot. But specific rates often are tied to sales volume, and the general rule of thumb is that 10-12 percent of the sales go toward rental costs. When adding occupancy charges, food court locations are even more expensive per square foot than the main corridor, although the spaces are tiny. The reason is that restaurants have more housekeeping and mechanical needs.

The next-highest rent is next door, so to speak, at the Shoppes at Stadium, formerly Biscayne Mall. Asking rent has gone as high as $40 per square foot, although actual rents are ranging from $25 to $35.

The retail spaces anchored by Wal-Mart Supercenters generally exceed $20 per square foot.

Retail space also gets more expensive in southwest Columbia, the region with the highest per-capita income. The Village of Cherry Hill is something of a bargain at the low end of the Class A average, however.

Five years ago, Columbia had very little Class A space, which is either new construction or comparable quality in high-traffic areas. “We had the mall, and that was about it,” said Jack Maher of Maly Commercial Realty.

But retail space and office space have been overbuilt in Columbia during the past four years or so, when financing has been relatively easy to obtain. “Right now we’re seeing a really slow absorption,” Realtor John John said. “I’m relatively confident we’ll chew through excess inventory in the next 12 to 18 months.”

Maher and Jay Lindner of Forum Development Group say the primary reason for the increase in rental rates is the rising cost of building materials, land and labor. The price of steel, for example, has more than doubled recently, Maher said.

At Broadway Shops, Lindner said, it cost about $20 per square foot to build retail and office buildings five years ago, and now it costs close to $35.

“It’s amazing how these prices have skyrocketed lately,” Lindner said.
Downtown rental dynamics

Some of the highest rental increases have happened downtown in renovated buildings, with some space rented by chain stores going for more than $20 per square foot.

Arnie Fagan, a Realtor and owner of Cool Stuff, said downtown generally remains a bargain at $15 to $18 per square foot for most main-floor retail space. Some of the unimproved space goes for less than $12 per square foot, but even that category has risen by several dollars recently.

“There is a shift that is happening,” Fagan said. “People might get squeezed out of premier spots and have to move to less trafficked spots. But I don’t think they will be completely squeezed out.”

Chris Stevens, co-owner of PS:Gallery on Broadway, said, “You can chase away the mom-and-pop stores because the rent is too high.”

Rents above $20 per square foot downtown generally are not justified by accompanied increases in foot traffic, he said.

“I’d pay $25 to $30 if we had the foot traffic to justify it,” Stevens said. “I don’t feel we do yet.”
Downtown property owners John Ott and Glen Strothmann said the value of property is going up in part because they and other landlords are renovating deteriorating structures, an expensive proposition.

“There have been a number of property improvements that justify higher rents,” Ott said.

Foot traffic downtown also has significantly increased, Ott and Strothmann said, to an amount higher than any time since the mid-1980s, before the mall opened and sucked away downtown shoppers.

“I was around when it was as dead as a doornail downtown,” Strothmann said.

Strothmann said retailers used to renting space for less than $9 per square foot are concerned by the trend.

“There is a big fear of outside investors coming in and driving up rents,” Strothmann said. “But rents must be balanced or none of this work will be viable… It’s healthy to have a mix of local stores and national chains.”