A downtown storefront that had stood empty in the heart of Steamboat’s historic shopping district since mid-September 2009 was leased last week. The commercial property market is beginning to find an equilibrium between retail activity and lease rates.

Photo by Tom Ross

A downtown storefront that had stood empty in the heart of Steamboat’s historic shopping district since mid-September 2009 was leased last week. The commercial property market is beginning to find an equilibrium between retail activity and lease rates.

Downtown rents are being renegotiated

Downtown Steamboat Springs commercial market begins to regain its balance

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— The storefront at 824 Lincoln Ave. is on the sunny side of the shopping district in downtown Steamboat Springs, and last week, it went under a new five-year lease with an option to purchase.

“It’s a deal I think works for everyone,” commercial broker Steve Hitchcock, of Prudential Steamboat Realty, said.

As a downtown retailer and owner of Zirkel Trading, Hitchcock is familiar with both sides of the equation.

“Most of the landlords in downtown are pretty darn flexible about the terms for new leases right now,” Hitchcock said. “You can get a great rate for the relatively short term.”

However, he added, they are sufficiently optimistic about the long term that they aren’t locking in low lease rates for multiyear leases.

The new tenants on Lincoln Avenue got a “realistic” rate to start out but one that steps up over time, he said.

The building at 824 Lincoln Ave., previously occupied by Paradise Found, was listed for sale for $999,000.

A new equilibrium

Commercial appraiser Kevin Chandler, of Chandler Consulting in Steamboat, said the market for commercial properties here is returning to a state of equilibrium after the real estate bubble of 2007 burst.

“Prices are coming back down to a level that can support existing lease rates,” Chandler said. “Hopefully, retail receipts will continue to support those rents.”

Chandler spoke to about 40 businesspeople Wednesday during a property tax seminar hosted by Mainstreet Steam­boat Springs at Centennial Hall.

Chandler told the gathering that 2010 is an opportune time for business owners to re-examine what they are paying for leased commercial space.

“If your rent is 20 percent of your sales (instead of a more desirable 6 to 8 percent), and that doesn’t make sense for you, it’s probably not a bad idea to make your business more efficient,” he said.

That could mean expanded evening hours and taking steps to ensure that your employees aren’t parking in front of the store, he said. It also could mean opening discussions with your landlord on a lower monthly rent.

“It’s happening all over town,” Chandler said.

Seminar organizer Bill Moser, also a commercial broker and property manager, said he recently renegotiated a lease on behalf of a landlord on a property in the heart of downtown Steamboat.

“The tenant came to us and showed us the sales figures, and said they couldn’t continue on unless they got a break,” Moser said.

He declined to divulge the name of the tenant but said they are good operators and valuable to the landlord. He said he knows of three or four other landlords who have renegotiated their rents in the middle of a lease.

“Keeping a tenant in place is good,” Moser said. “That’s what you want to do.”

And when it comes to collecting rent in a difficult economy, “Something’s better than nothing,” Moser added.

The commercial leasing market in downtown became unbalanced, Chandler said, during the real estate run-up from 2005 to 2007. When buyers began purchasing older downtown buildings for redevelopment, purchasers, in some cases speculators, paid more for commercial properties than their rental history supported. Prices quickly went from the range of $300 per square foot to more than $400 and, in a few cases, more than $500.

For long-term investors in commercial property, Chandler said, a key term is “cap rate.”

The cap rate on a property, he said, is a combination of the cost of borrowing money to acquire the asset and the reasonable return on invest.

Put simply, Moser said, the cap rate is a function of what a person will pay in order to get a return on investment.

Banks would like to see commercial property buyers project a cap rate that allows them a return on investment of 7 to 8 percent as opposed to the range of 4 to 5 percent, Chandler said. But some purchasers during the real estate run-up were speculators expecting to sell and profit in the short term.

“There were some (cap rates) that were lower than the interest rates,” on the loans, Chandler said. “That was the real disconnect.”

The coming year also could become a good time to purchase commercial real estate, while prices are more attractive and there is the opportunity to lock in low interest rates, Chandler said. Several Steam­­boat restaurateurs bought their buildings in the post-9/11 malaise of 2002 and 2003.

Even if their sales have suffered in the past 18 months, they are fortunate to be paying less for their dining rooms than they might have otherwise, he said.

The storefront at 824 Lincoln was last vacated in mid-September 2009, and it was too late for a new tenant to get open in time for holiday shoppers, Hitchcock said. However, in the past several weeks, there was a flurry of interested tenants. He declined to say what type of business will fill the space but said that the tenants hope to be open to customers in June.

— To reach Tom Ross, call 871-4205 or e-mail tross@steamboatpilot.com

Comments

JLM 4 years, 8 months ago

Cap rate or "capitalization rate" is the ratio of "expected net operating income" and the "cost of the real estate asset"

NOI/cost = cap rate

In a healthy market a good cap rate is "cost of money" + 2-300 bp (basis points) or cost of money + 2-3%.

If you can access capital at the Prime Rate of 3.25% then a "good" cap rate would be 5.25-6.25%.

Interest rates are at all time lows and the discussion of historic cap rates is a very difficult discussion as these low interest rates seemingly result in extremely low cap rates.

If one could borrow money at 3.25% and invest it to receive a 6.25% rate of return, then I would be all over it.

The key for the prudent real estate investor is to lock in the low rates for a long, long, long time.

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