Philadelphia region faces increasingly harder to find and more expensive commercial real estate
Despite the ongoing uncertainty of the pandemic economy, the US commercial real estate market continues to flourish with “record high asking rents driven by historically low vacancies and robust demand for space,” according to real estate investment firm CBRE. Thanks to higher e-commerce demand, industrial rents rose as much as 20% in some areas of the Philadelphia area by mid-year.
Ty Martin, a managing partner at McCann Commercial Real Estate in Philadelphia, said the office market is also performing better than expected, with both rental rates and square footage remaining “about the same” as before the pandemic. He said that many of the small and medium-sized businesses in the region have returned most of their employees to the office, and a good number of companies are changing their internal designs to accommodate safer spaces for returning workers.
“Before COVID, we saw how many people were pursuing open office concepts,” said Martin. “But now we are seeing another shift towards a strong demarcation of people in private offices and workstations at the back with cubicles that take up more space.”
Just like the regional office space market, the industrial halls – especially for properties with 5,000 to 10,000 square meters – were extremely strong.
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“This market is very, very hot,” said Charles Swope, who runs Swope Lee’s Commercial Real Estate in West Chester. “We have significantly more demand than supply for this sector. Our customers pay record prices for leasing and buying. “
Much of the commercial space is being devoured by bigger players, according to Swope, but there are plenty of options for small businesses as long as they’re willing to do what a landlord needs for a great location.
For example, both commercial property owners and commercial real estate agents are looking for companies with good financial records and need tax returns, annual financial statements, bank records and credit checks as evidence. Leasing agents particularly like motivated businesses because they need the location and space to accommodate a new contract, recent acquisition, or business growth that pushes them to expand. No commercial property owner or broker offering space wants to take inappropriate risks or speculate.
“That doesn’t mean we don’t work with startups,” says Swope. “But you have to have a story and prove that your company is creditworthy.”
The world has changed for small retailers too. Many landlords are now leaning towards more “experience” stores where the offer cannot be bought online. It is for this reason that we see so many more yogurt shops, cafes, restaurants and training venues in shopping areas and fewer vendors selling shoes or clothes.
Regardless of what you’re selling, most landlords want to see how a tenant is willing to pay their rent over the longer term. Martin insists that his customers do their best to understand what they can afford and take the time to forecast their sales and costs. He often delves deep into the business model of a potential tenant.
“If you choose an area with high pedestrian traffic, that’s great,” he said. “But how often will you convert? And how many products do you have to sell at what price, from the point of view of your sales, to cover your rent and then still achieve the desired profit margin? “
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These are the questions a landlord or real estate agent will ask. Martin often advises his customers to consider factors other than pedestrian traffic when determining their location.
“Most barbershop, for example, use word of mouth because a lot of people don’t go down the street and say, ‘I’m going to have my hair cut here,'” he said. “So maybe in this situation you don’t need such a high pedestrian zone and can get a cheaper place instead.”
In addition to financial projections, it is common for landlords to require a minimum commitment of five years with an expected annual cost increase of around 3 to 5%, according to Swope and Martin. Many leases also involve some negotiation of the apportionment of construction or retrofit costs required to use it.
Due to today’s competition, commercial landlords are demanding more transparency from their tenants. This is because each party takes long-term risk and therefore both Martin and Swope want to work with clients who can demonstrate that they have a future source of income that can cover their costs, including their rent, and generate profits.
The market, as well as the added complexity of rental space, has also motivated some real estate firms like Martins to offer services where they independently represent a tenant for a stand-alone fee usually paid by a landlord. This way, a small business owner unfamiliar with the market can count on an expert to determine the best location, find the best prices, and get a great deal.
“When you have a tenant representative by your side as a teammate and understand your business, you can negotiate the best possible lease,” he said.
Gene Marks is a certified public accountant and owner of Marks Group, a technology and financial management consultancy based in Bala Cynwyd.