More small-space retailers seek locations

Small shopkeepers and restaurateurs appear to be seeking more locations in the Reno area, and landlords hope they'll begin seeing a reduction in historically high vacancy rates.

But with large anchor tenants - Sports Authority, Safeway - exiting the market in recent months, it will take a fleet of smaller users to impact vacancy rates.

Kelly Bland, senior vice president with the retail properties group for NAI Alliance, says interest in small shop space has been spread out over all areas of town and from a wide range of potential tenants. But Ken Mattison, vice president of the retail services group with Grubb & Ellis, says his firm has seen an uptick in clients interested in older - and more affordable - second-generation retail space.

"We are getting virtually no play in stuff $2 a square foot and above," Mattison says. "Second-generation space is certainly winning the day, there is no question about that."

Rick Casazza, senior vice president with the retail services group at Colliers International, has fielded inquiries from a number of national quick-service restaurants, mom-n-pop dollar stores, sports bars and cell phone franchises. Most tenants seek space in the 1,200 to 1,500-square-foot range, he says.

Interest in location ranges from power centers to neighborhood centers to strip malls.

"It's a lot of value priced," Casazza says. "People are moving around. They are seeing that rental rates have dropped and they can get into space they haven't been able to in the past."

NAI Alliance also has seen inquiries from small, quick-service restaurant users, as well as local entrepreneurs who feel the time is right to open a business. Low lease rates and rental concessions from landlords have helped spur interest from people who waited through 2009 to make significant business decisions, Bland says.

"It is a new year, and people are kind of tired of sitting on their hands," he says. "They know that prices have come down and that landlords are aggressive in making deals. We are coming out of the recession, and this is time to get started. It is a good time to pull the trigger on their dreams of always wanting to own their own store."

Chris Waizmann, senior vice president with the retail properties group at CB Richard Ellis, says that though there seems to be more optimist with potential tenants after the New Year, deals are taking much longer to ink as retailers proceed with caution.

"There is still a lot of uncertainty about where the market is going with unemployment levels so very high in Northern Nevada," he says. "The economy seems to be picking up, but there still are a lot of challenges out there."

Waizmann estimates that there is more than 1 million square feet of empty storefront space in Reno-Sparks. The loss of three Hollywood Video locations, Safeway at Firecreek Crossing and Sports Authority at Sparks Galleria added an additional 113,000 square feet of dark space to the market.

"We are still seeing fallout," Waizmann says. "And it takes a lot of small shop space and a couple of junior anchor deals to impact vacancy rates."

Overall retail vacancy in the Reno-Sparks market stood at 16.85 percent in the fourth quarter of 2009, says Bland. But the vacancy rate for smaller spaces - "line-shop space" in industry terms - stood at nearly 21 percent. Both vacancy rates are the highest levels since NAI began tracking the market in 1990, Bland says.

With the historic highs in vacancies, market-savvy tenants are bringing increasing pressure to bear on landlords to secure attractive lease rates and tenant improvements.

"Everyone is kicking us in the knee," Mattison says. "They know that rents are low and that is where they want to play. We have some landlords saying, 'I need some warm bodies,' and others that are challenged to chase the market down that far."

Much of the interest in line-shop space comes from existing businesses that are ready to relocate if landlords are unwilling to renegotiate lease terms, Mattison adds. Landlords face the daunting task of setting asking rental rates low enough to lure tenant interest, but at the same time keeping them high enough to stabilize their properties and values. The result presents a quandary, Mattison says.

"Do they keep asking rents at strong levels, knowing that they will be underbid, or do they lower them and not take such an underbid to increase the flow of traffic?

"Landlords right now are struggling trying to set the bar. If they set rates where they need to be knowing they will get undercut by the offer, they have the risk of not getting much traffic looking at the space, so do they bring it down and still get it undercut? Tenants don't see that but we do."

Bland says that although a number of anchor tenants are expected to leave the market in the first quarter, he expects retail vacancies and lease rates to begin stabilizing in the quarter.

"Our hope is that the number of businesses that are leaving or going out of business has moderated and that the new people coming in will outpace those that have been leaving. I think we will see that crossover this year, and that will help us start filling up that vacant space in the market."