By Angelina Hagler

In the realm of commercial real estate, vacancy rates play a crucial role in evaluating the financial health and viability of certain markets, and are heavily influenced by supply and demand. The vacancy rate of a certain market shapes the operational environment, financial health, and strategic decisions of tenants. This is particularly true for retail buildings, whose location directly impacts how much money the business inside makes. Landlords, who are the owners and managers of these properties, closely monitor vacancy rates as they directly influence profitability and overall asset value. Let’s delve into how vacancy rates affect retail buildings and markets, and what both landlords and tenants can do to mitigate their impact.

What is a Vacancy Rate?

The vacancy rate refers to the overall percentage of rental properties within a particular market that are unoccupied. It is the opposite of an occupancy rate.

Factors Influencing Vacancy Rates

1. Economic Conditions: During economic downturns, consumer spending may decrease, leading to reduced sales for retail tenants, especially entertainment and restaurant retailers. This may result in an inability to make rent payments, and subsequent eviction. With interest rates also being higher, businesses may be less likely to be able to finance their tenancy in a retail building with an SBA loan. 

2. Location: Issues tied to an area, such as homelessness or crime, ease of transport, and sometimes even weather, may also affect desirability of a location, and people’s decision to move in.

3. Lease Terms and Conditions: Landlords offering flexible lease terms, competitive rents, and attractive incentives (such as tenant improvement allowances) are more likely to retain existing tenants and attract new ones. So, the opposite is true for landlords who won't offer concessions or negotiate. Sometimes, especially in areas with long-standing property ownership, the landlords don’t have to make mortgage payments, etc., anymore, and can sit and wait to attract whichever tenant they prefer. This can take a while, and can contribute to a market’s vacancy rate.

Impact on Landlords

1. Lack of cash flow: Vacant spaces directly impact a landlord’s revenue stream. Each empty unit represents lost rental income that could otherwise contribute to covering mortgage payments, maintenance costs, property taxes, and other operational expenses.

2. Property Valuation: High vacancy rates can lower the overall value of a retail building. Properties with consistent vacancies may be perceived as less desirable by potential investors or buyers, affecting their marketability and potential resale value. A retail building with high vacancy rates might create a perception of instability or lack of foot traffic among existing and potential tenants. This can deter reputable businesses from leasing in the building, further exacerbating the vacancy problem.

3. Maintenance and Upkeep: Vacant spaces often require maintenance and upkeep to prevent deterioration and maintain the overall attractiveness of the property. This adds to the landlord’s operational costs without corresponding rental income.

Mitigating Vacancy Rates

To address high vacancy rates and minimize their impact, landlords can consider several strategies:

1. Market Analysis: Conducting thorough market research to understand local retail trends, consumer behavior, and competing properties can help landlords position their buildings more effectively.

2. Tenant Retention: Prioritizing tenant satisfaction through responsive property management, proactive maintenance, and fair lease terms can encourage existing tenants to renew their leases.

3. Marketing and Promotion: Implementing effective marketing strategies to showcase vacant spaces and highlight the benefits of leasing in the building can attract new tenants.

4. Adaptability and Flexibility: Being open to adapting lease terms and space configurations to meet the evolving needs of retail tenants can enhance the building’s appeal.

5. Investment in Property: Regular maintenance, improvements, and upgrades can enhance the attractiveness of the retail building, making it more appealing to potential tenants.

Impact on Tenants

Impact on Operational Environment

1. Foot Traffic and Customer Base:

• Reduced Foot Traffic: High vacancy rates can lead to a decrease in foot traffic within the general area, because less shoppers will make the commute to a location with fewer retailers. Thus also resulting in less visibility for storefronts, meaning less people know they exist. Additionally, vacant storefronts often create an impression of a less vibrant and attractive shopping environment, which can deter potential customers from visiting the area.

2. Competitive Dynamics:

• Increased Competition: In a building with high vacancy rates, remaining tenants, especially those selling similar products or services, may face intensified competition for a smaller pool of customers. This is especially true when there's no considerably larger retail tenant, (known as an anchor tenant, typically a large grocery store) to draw people to a location out of convenience/necessity. 

3. Operational Costs and Lease Terms:

• Impact on Costs: Landlords may spread out common area maintenance costs and utilities among fewer tenants, potentially increasing the per-tenant operational expenses.

• Negotiating Power: High vacancy rates often give tenants greater leverage during lease negotiations. Tenants may have the opportunity to negotiate lower rents, extended lease terms, or additional concessions from landlords aiming to retain or attract tenants to fill vacant spaces.

Financial Considerations

1. Rent and Lease Stability:

• Rent Adjustments: Landlords may adjust rents or offer incentives to entice new tenants into vacant spaces. Existing tenants might benefit from stabilized or reduced rental rates as landlords seek to maintain occupancy levels.

2. Long-Term Viability:

• Tenant Retention: For existing tenants, a stable retail environment with low vacancy rates enhances long-term viability. Reduced turnover and a stable customer base contribute to sustained business operations and growth opportunities.

Strategic Responses for Tenants

1. Enhanced Marketing and Visibility:

• Strategic Promotion: Tenants can implement targeted marketing strategies to enhance their visibility and attract customers despite surrounding vacancies. Collaborative promotions and events with neighboring businesses can create a more attractive shopping destination.

2. Adaptability and Resilience:

• Diversification: Tenants can explore diversifying their product offerings or services to appeal to a broader customer base. Embracing online sales channels or adjusting operating hours based on foot traffic patterns can mitigate the impact of fluctuating vacancy rates.

3. Community Engagement:

• Local Engagement: Building strong ties with the local community through sponsorships, partnerships, or involvement in community events can help tenants cultivate a loyal customer base. A robust community presence can insulate tenants from the negative effects of high vacancy rates.

In conclusion, by understanding these dynamics and implementing proactive measures, both tenants and landlords can navigate challenges posed by high vacancy rates effectively. Strategic marketing, flexible operational strategies, and proactive engagement with the local community are essential for maintaining resilience and fostering long-term success in a dynamic retail landscape.

If you have more questions about retail and real estate, don’t hesitate to reach out to Commercial Brokers International at 310-943-8530 or info@cbicommercial.com, or me, Angelina Hagler, at 310-943-8547 or angelina@cbi-commercial.com