Vacancy Tidal Wave Hits California

LOS ANGELES-Everyone says it’s a buyer’s market—and they’re right. While many assumed that the recession was going to be V-shaped with a fast decline and a fast recovery, they were wrong and California landlords and tenants are finally starting to catch on.

Many landlords and developers as well as existing retail tenants have spent the last 12 to 18 months working with lenders to restructure their own current financial condition and in some circumstances modify their existing loan agreements.

But as landlords and tenants realize that simply working with their lenders on their debt is not the core problem, they will turn to their large fixed operating costs for savings, and in many cases this will mean their leases. Many have just given up hope entirely, which will result in a very large release of available space throughout the remainder of 2010. It’s not the large box stand-a-lone establishments like Kohl’s and Target that are going out of business. It’s mostly the medium and small tenants that tend to be in the middle of the shopping center as well as many restaurants that have no point of differentiation amongst the large number of competitors.

While most retailers don’t want to lose their footprint, and landlords don’t want to lose their rental income, they both are going to have to face reality and either make a deal or lose a tenant/location. Those looking to avoid the pending wave of vacancy and store closures should openly negotiate with their tenants or landlord and suggest aggressive incentives now rather than later.

Tenants should clearly communicate and illustrate to the landlord their recent successes as well as future goals. They need to be prepared to offer a higher percentage rent in exchange for a lower base rent. Regardless, make it clear that they are better off having you in that space rather than no one! My advice to landlords is to listen and accept the offer. Because once a vacancy happens, the spaces are taking a long time to fill.

For those looking to begin a new business, you are better off renting than buying. Landlords just aren’t willing to sell at a reasonable price because the market is tremendously depressed. Landlords are hoping there are better times to come and they’d rather sell closer to the top than the bottom. If you want to expand your business, you should be actively engaging your retail brokers and landlords for potential opportunities while also contacting lenders regarding possible distress prospects.

At this time, there is nothing going against the renter, so I strongly suggest businesses to take advantage. Be confident and deliver your proposal in a manner that stresses a win-win scenario for everyone involved. Chances are you’ll be able to obtain a great location for a great price.

Anand Gala is the president and CEO of Los Alamitos, CA-based Gala Corp., a privately-owned hospitality and food services companies. For more information, contact Anand at 800-653-3517 or via e-mail at [email protected].