Meeting the Market or Awaiting a Rebound

Elm Street. Main Street. Park Street. Pine Street. East Avenue. What do they have in common? Not only are they streets of downtown New Canaan, but they are all home to vacant storefronts.

There are a lot of potential explanations for so many commercial real estate vacancies. The downturn in the economy is an obvious one. Consumer spending has slowed. With financial institutions tightening their belts, it is harder for small business owners to get the funding required to start up or expand.

The competitive landscape has also changed over time. New Canaan is known for its collection of independent merchants. But it is still easier than ever for consumers to get access to unique or hard-to-find items online, compare prices and have their purchase delivered to their door without leaving the comfort of their home.

The struggling economy has made it harder for tenants and landlords to find common ground. Jack Trifero, owner of the Gramophone Shop and head of the New Canaan Village Association before it folded into the Chamber of Commerce, called a meeting back in November 2008 to begin a dialogue with over 20 landlords about the situation.

“Store volumes were dropping, but the town was still priced for perfection,” Trifero said.

They discussed the need for landlords and tenants to "share the pain," but Trifero said there were still landlords who clearly did not understand the severity of the situation and did not make any adjustments to their management style.

One landlord likened his current situation to gambling. With many commercial leases having five year terms, a landlord could lock in low and rent a space now, and then find himself financially behind at the end of the five years. On the other hand, it could be better to rent it out to take in a lower rent than no income at all by leaving a space vacant.

In some cases the landlords have owned their properties for so long that the mortgages are paid off, and in others the owner manages multiple buildings, making it easier to defray cost or write off losses rather than rent at the bottom of the market.

With a declining cash flow and little room to negotiate, some merchants have had to shut down their businesses all together.

Tools of the Trade are Changing

Coldwell Banker commercial real estate broker Robert Haile, who works out of the agency’s Long Ridge Road office in Stamford, says another big factor is that some owners and brokers in town have not kept up with changes to the tools of the rental trade.

"Would you work with a real estate agent to sell your house if they weren't going to list it on the MLS (multiple listing service) system?"

Haile points out that some of the brokers and landlords are not using newer tools that are now critical to marketing commercial real estate spaces, similar to the role MLS plays for residential real estate. Centralized systems like CoStar list available commercial real estate around the country, and many properties in New Canaan are not on them. Haile says relying on word of mouth or hoping someone would take a walk through town to find an available location used to be enough to generate interested tenants, but that is not always the case anymore. He is in the process of beginning a dialogue with many of the New Canaan commercial real estate owners to introduce them to these tools and represent their vacant properties.

Some brokers speculate that renting spaces has been slower for landlords who are trying to lease on their own. A broker’s fee is about five percent on a typical five year lease—usually equivalent to about three months rent.

Signs of a Turnaround

Despite the number of empty retail spaces around town, it seems like things may be on the verge of turning around. Selectman and property owner Rob Mallozzi says he has seen more interest in his vacant Park Street storefront next to Radio Shack in the last three weeks than in the last two years.

Some landlords are bending over backwards to help their tenants weather the turbulent economy. Kate Bonner, who owns a four storefront building on South Avenue, describes her management style as "sympathetic." She calls all of her lessees on a monthly basis to discuss their financial situation. She would rather make payment arrangements with a lessee to keep his or her business afloat than be inflexible and see them shut down.

Bonner's flexibility and humanistic approach comes at a personal expense. Like so many others in this economy, she has cut back on discretionary expenses such as clothing and dining out, scaled back on personal travel (including skipping a visit to an ill family member), and given up expensive hobbies like tennis and golf.

Normal Lotstein of Pyramid Real Estate, who represents the former Wire Whisk location on Main Street, said there has definitely been more recent interest in the space, although he feels people are still slow to commit.

Property manager Anne Hannon just signed a new tenant for her vacant Forest Street location. "Coming Soon" signs for the New Canaan Diner are already up in the window, and she says the property owners were able to choose from over 25 interested tenants. Hannon has six parties scheduled to visit her locations at 86 and 90 Main St. within the week, two of which are re-visits. She thinks all of her vacant spaces will be filled within the next month and a half.

Hannon attributes the success to a few key strategies. First, the owner has invested money into upgrading spaces to help attract tenants. Second, the rent is intentionally priced below the going market rate to attract more interest and allow them to choose their tenants. They are offering 86 Main St. and 90 Main St. at $42 per square foot, including heat. Tenants only have to pay for electricity and increases in expenses like real estate taxes, versus other buildings with higher rent and a common charge to cover the pro-rata share of total expenses. With 96 Main St. being offered by another landlord at $59 per square foot, it is understandable why her properties have been generating more interest.

The town has also made a greater commitment to driving increased foot traffic to downtown. In June 2009 the Chamber of Commerce hired Linda Kavanagh and MaxEx Public Relations to improve upon existing events, such as the Holiday Stroll, as well as create new events and publicity to draw out-of-towners to downtown.

So far 43 local merchants have signed on for inclusion in the events and publicity from June through December at a cost of $100 per month each. Previously, the town did not have resources dedicated to generating publicity. The new approach is generating renewed enthusiasm and energy for many local merchants.

Despite their differences, the landlords and merchants are all hoping for the same thing. A boost in business would be a great way to finish off what started out as a slow year.