Retail landlords offer blue-light specials to tenants

Not too long ago, retail broker Joel English was offering neighborhood retail center tenants about $15 to $20 per square foot as in improvement incentive. These days, that sum just won't cut it.

English and other brokers and landlords in the retail real estate field have had to up the ante, offering as much as $35 per square foot or more for tenant improvements. And in some cases, landlords are throwing in other deal-sweeteners such as longer build-out periods and even free rent in an effort to shore up the struggling sector.

"It's a citywide problem," says English, president of Houston-based CEC Brokerage. "Landlords are getting anxious because there's too much retail on the ground and it's getting tougher to compete with the grocery-anchored centers."

Indeed, the third quarter of this year represented the third straight year-to-year drop in occupancy levels in the neighborhood center sector, as overall occupancy fell to 84.57 percent. That's down from 85.09 percent in the third quarter of 2006 and 85.68 percent in the third quarter of 2005, according to Houston-based real estate services firm O'Connor & Associates.

The south sector of the city recorded the highest occupancy rate, 93 percent, while the lowest occupancy was found in the far north sector at 77 percent.

"It appears that occupancy is trending down, so it would make sense that landlords are offering discounts to lease the vacant space," says Kathryn Koepke, a researcher at O'Connor & Associates.

Even with the incentives, English says, some centers are taking as long as three to four years to fully lease.

English has represented six centers on Louetta over the past year and says he has had particular difficulty finding tenants for the centers in that area of Northwest Houston.

That's where the financial carrots come in.

English was given the green light to offer that $35-per-foot tenant improvement at a retail center he is currently leasing at 4000 Louetta. The center, which was built in 2006, is only 70 percent leased.

English has also been involved in leasing a center in the 9000 block of Louetta, which was built in January 2007, that is only 40 percent leased, as well as another center on the same block built in March of this year that hasn't leased to a single tenant.

"It's very unfortunate because there's just a glut of this type of space out there, and it's hard to attract any sort of interest," he says.

Meanwhile, Lyle Cowand, senior vice president with retail brokerage firm The Weitzman Group, says certain areas -- such as north of Barker Cypress, north of Fry Road and north of Eldridge -- are home to a large percentage of these struggling neighborhood centers, which typically are designed to be unanchored.

He says the roads in those areas are full of vacant neighborhood centers flying banners that read "Free Rent."

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source: bizjournals.com