Commercial tenants are navigating rising rents

Parker Wilson, the owner of a company that makes all-natural cleaning products, inadvertently missed a deadline to inform her landlord that she wanted to renew her lease.

As a result, she faced the exorbitant prospect of having to move her company’s base of operations, SQUEAK, from Netherlands Drive in Dutch Square off Market Street to a new location.

Eventually, she said, the landlord began working with Wilson on terms that would allow her to stay.”It’s the perfect location,” Wilson said of her current space, adding that it’s only seven minutes from her home and equipped to meet SQUEAK’s specific needs. “We have ongoing renewal contracts with major retailers such as TJ Maxx. If I have an existing purchase order and cannot fill it, I will forfeit that contract completely.”

The Wilson experience is one of the realities small businesses across the region face when trying to find commercial space, which also includes increased rents and a lack of inventory.

Cal Morgan, the commercial appraiser who owns Wilmington-based J.C. Morgan, said he and his partners own several properties, not affiliated with the SQUEAK space, in Dutch Square.

Based on that ownership “and what we’ve seen perform our valuation work, rents have increased by about 25%” over the past two or three years in Dutch Square, Morgan wrote in an email, adding that the industrial and office warehouse space “has some of the highest growth rates.” rents in our area.

Exact industrial lease rates per square foot vary widely, with all the usual caveats that include location, size, age of the structure, utilities, etc. But commercial real estate brokers agree that industrial rents have been increasing even more.

Some long-term leases of commercial space include built-in and additional rent increases. Other rental rates correlate with the country’s Consumer Price Index (CPI), which jumped 9.1% in annual statistics released by the federal government in July. The Consumer Price Index, which is a measure of inflation, measures the total prices people pay for goods and services.

“Lack of supply with higher demand equals higher prices,” said Nick Selivanch, partner at Wilmington-based Eastern Carolina Commercial Real Estate (ECCRE). “Industrial flexible rents a couple of years ago were still in the single digits. You are now double digits and it is also for a new space.”

Examples of industrial demand intensity include North Kerr Industrial Park. A Cape Fear Commercial press release in June featured the Wilmington-based company’s work in the park, which has been sold out.

Will Leonard, CFC’s senior vice president, has brokered the sale of nine industrial park blocks over the past year, according to the statement.

“Across the market, old industrial space available at low prices has been absorbed,” Leonard said in the statement, which was referring to sales, not rents. “Prospects now recognize that newly constructed buildings deserve the higher rates, based on the efficiency of higher stacking heights and modern fire suppression systems. All current specification buildings in our market are currently 100% occupied, with more construction on the near horizon.”

Rents have remained more stable in the office sector, Morgan said, “However, the rise in the cost of new office projects appears to outpace the rent growth for these properties.”

In other words, no one can afford to rent new offices if the owners pay enough to cover the current costs of building them.

“That’s why you don’t see a lot of product coming off the ground right now,” said Steve Hall, partner at Wilmington-based commercial real estate firm Maus, Warwick, Matthews & Co.

However, some industries are looking for office space.

“Behavioral health groups seem really out of the woodwork now. I think they’re getting a lot of funding,” Hall said.

Bryce Morrison, the brokerage with Cape Fear Commercial based in Wilmington, focuses on the region’s retail market. “New construction costs for developers have forced higher rental prices to make their economies work,” Morrison said of the retail sector. “It just makes the existing space more valuable.”

Wilmington is not the only community in the area with a short supply of retail space in the size ranges that tenants require. Morrison said the shortage is also affecting Pender and Brunswick counties.

“There is nothing in Hampstead and even in Surf City now,” he said. “We have a lot of users searching in this market and nothing is available, and usually when something comes up, it often just doesn’t make it to the market.”

That’s because landlords and property managers tend to have a backlog of business owners who have inquired about space they can access directly without listing a rental property.

Morrison said the spaces he’s referring to are 3,500 square feet or smaller. Larger spaces, such as the Pier 1 Imports stores in Hanover Center and Mayfaire Town Center for example, have remained vacant. In other cases, some of the larger spaces have been divided into smaller widths.

“Everyone is trying to figure out how to standardize and do more with less square footage,” Morrison said.

John Hennant, another broker at ECCRE, said landlords need to consider whether the economy is in a recession.

“You have to remember: the best tenant is the one who actually pays the rent, not the one you hope to get… If he had a good tenant, he was good with them, [landlords] You have to be patient with this economy, and perhaps work with them if they want to maintain good ownership of steady cash flow,” Hennant said. This is a good time to push the rent envelope if we might be entering a recession.”

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