Rodger Spero says commercial real estate is slowing in an economy where businesses close and aren’t replaced by new ones.
Two months ago, the Bellingham Housing Authority finished remodeling the Hotel Laube on State Street. The historic downtown building, located on the same block as the YMCA, has two ground-floor commercial spaces that face a busy street with plenty of foot traffic — a desirable location by most standards.
Lydia Place snatched up one of the spaces, but the other 2,800-square-foot space remains empty.
Commercial real estate broker Rodger Spero said he has shown the space to several possible businesses, from retail to restaurant, but has yet to sign a tenant.
“It’s harder to lease a larger space,” Spero said, adding that most startup businesses that would be interested in a shell space prefer smaller and less expensive locations.
And these days, fewer new businesses are daring to test the lagging economy. In turn, this trickles down to the commercial leasing sector, which is seeing vacancy rates rise all around Bellingham.
“You need a significant amount of cash to start a business now,” Spero said, especially restaurants and other types of business that require expensive improvements to a shell space. “Once [a space] is a restaurant, though, it’s easy to lease it again as a restaurant because it already has all the amenities.”
Retail sector has slowed
At Blossom Management, owner Ken Hertz said he has seen vacancy rates rise from 5 percent to nearly 10 percent in the past several months. Most of the vacancies are in retail locations, he said, either from business closures or because of a smaller than usual supply of new retail tenants.
“It’s a tough business. Some make it, some don’t make it,” Hertz said.
Though retail profits in Washington state rose 5.5 percent from the first quarter of 2007 to the first quarter of 2008, several key markets took a dive, according to the Washington State Department of Revenue.
Shoes stores saw a 20.5 percent drop, record and CD stores saw an 11.2 percent decline and department stores saw sales fall 8.1 percent. Areas like e-commerce and sporting goods, however, rose and helped buffer the retail sector.
“Small retail is not dead, but it’s probably not as robust as it was last summer,” said Ken Reinschmidt, president of Saratoga Commercial Real Estate. “It has flattened out but not gone away.”
As sales slip, most businesses are holding off on moving or expanding.
“We’re seeing people be very cautious as renters,” he said. “If someone was going to make a move, I think we’re seeing them wait and sit it out. I think what everyone is waiting for right now is some good news about the economy.”
Limited supply of office space
While retail locations are struggling to find tenants, the market for office space is going strong.
“We don’t have any vacancies in offices right now because they are typically smaller and affordable,” said Hertz.
Office leasing is generally a healthier market because it appeals to a broader spectrum of businesses — not every company needs the exposure offered in retail locations. And these days, it has become especially competitive because of a lack of new offices coming into the market.
“There are very few new offices coming into the market,” Reinschmidt said, adding that it is harder for developers to get financing now. “The development game is risky because you don’t know how long it will take and right now lending is tight. A lot of money has to go down from the developer and the cost of building a new building is such that developers cannot afford to rent it out.”
And now there are more players vying for the limited resource. The Canadian dollar has enjoyed historically high exchange rates for nearly a year, thus encouraging Canadian companies to look at entering the U.S. market via Whatcom County.
“Last year half of our business was with Canadian companies,” Reinschmidt said. “About 40 percent of our industrial market is generated by demand from Canadian companies.”
Moving to a home office
For some businesses, though, now is a good time to get out of an office.
Ryan Mitchell, owner of Ace E-manifest Solutions, moved his business last month out of a 900-square-foot office in Bellingham to his recently purchased home in Blaine.
Mitchell originally started the business in a house two years ago, but quickly moved into an office off Lakeway Drive as the company grew. Plus, his home at the time was too small to accommodate a home office.
But now that his business, which creates electronic files for trucking companies taking shipments across the border, has reached a stable point of operation, Mitchell said moving the business was an easy decision.
“I wouldn’t have minded staying in Bellingham, but the fact that I could move my mobile Internet business into a house was icing on the cake,” he said.
Mitchell was very specific about his new home office, though. It could not be attached to any part of the living area. And it has to have its own space — no dual functions of guest bedroom and home office.
Thankfully, his new space fits the ticket, he said. It’s downstairs and away from the rest of the house and even has it’s own entrance.
“If you plan it right, it’s one of the best moves you’ll ever make,” he said.
More of the same?
So, with all these comings and goings, what will the rest of 2008 bring for commercial leasing?
“More of the same through the end of the year,” Reinschmidt said. “Puget sound is a bit insulated, but everybody is a little bit concerned about seeing an impact in the next quarter or two. I’m optimistic that we’re going to cycle out of it.”
But there’s a lot of apprehension in the market right now and that could take a while to get rid of, said Brian Finnegan, president of WestCom Properties.
“People are holding tight and making do with what they have,” Finnegan said. “There’s a perception that things are doom and gloom, but since about 2002, commercial real estate has been on a scorching run through out the county.”
And as the holiday season approaches, many in the leasing business are looking for retailers to receive the jump-start they need to keep going. A good holiday season for business could mean that Santa brings that new office with a view for the local, small business.
Or perhaps a new tenant for what was once a thriving hotel on North State Street.
