Retail Lease Rates – Who is underwriting this stuff?

Something that I am beginning to dig into and try to understand around downtown and specifically on the North Shore is what I will loosely call ‘ambitious asking rates’ for vacant retail spaces.

While it is clear that downtown and the north shore are ‘under-retailed’ by just looking at the increase in residential units and the changing demographics all the new construction is asking national retail rates for their spaces.  This would work provided regional and national retailers were clamoring to plant their flags in the city. As yet that does not appear to be the case.

But the trend continues with proposed, in process and completed new spaces – even those like the retail adjacent to Whole Foods – asking for base retail rates of $25 – $30psf.

Simple math will tell you that the number of local retailers who can justify paying that kind of a rate ($75,000 – $90,000/yr on 3,000sf) is very very small and yet it continues and the properties do not seem to be motivated to do anything about it.

In my experience this type of thing occurs when those underwriting the project (bank / equity partner / etc) initially over estimate the potential retail rate in order to make a pro forma look better.  This causes a situation where adjusting the rate to where the space will actually be leased is like admitting a mistake. It is rare that I see these things corrected before things become financially distressed or the person overseeing the project is replaced by a fresh set of eyes.

It’s good to be proud and to aim for being a first tier city capable of commanding national level rents it’s far better to grow the local retail base to support it. The loyalty of locals is invaluable to supporting these projects long term vitality.