Bloomberg Business – September 22, 2016
by Patrick Clark
Commercial landlords are holding out for retailers that can boost property values and credit ratings.
Not long after he leased out the shell of a once-iconic Phoenix steakhouse, developer Lorenzo Perez got an email from a broker. He learned that the new space, now home to an award-winning restaurant, a small garden store, and an independent bookshop, was worth about $195 a square foot. Nearby retail properties, the broker said, were being valued at 25 percent more.
Why the difference? While Perez was courting local businesses, his competitors had landed large corporate tenants.
“My income stream isn’t much different, and I have the nicer building,” said Perez. “Because they have a Chipotle or a Starbucks or a Jimmy Johns, their valuations are on a whole different level.”
This isn’t a sob story, exactly, but rather an illustration of the commercial logic shaping American cities. As far as landlords are concerned, restaurant chains and large retailers are safer bets than mom-and-pop stores, Perez says. The same thinking goes for banks lending to property buyers, who will generally extend better terms when a chain business such as a Gap or a Walgreens is on the lease.
Those dynamics have proven harder to resist in recent years as investors have bid commercial real estate to record prices and competition in marquee markets such as New York and San Francisco have sent buyers looking for bargains in smaller cities. These out-of-town investors, once they arrive in Cleveland, Nashville, or Milwaukee, have a tendency to rely on relationships with national brokers and large-chain tenants, says Stacy Mitchell, co-director of the Institute for Local Self-Reliance, a Washington-based nonprofit.
The result, she says, is that small businesses that help give each city its unique character struggle to stay alive.