Softening Real Estate

Handling property transitions during a pandemic

Agean Bath and Spa had been considering expansion into Cleveland for some time, says owner Chris Bolte, but the opportunities just weren’t playing to Agean’s favor.

That is, until COVID-19.

With locations in Cincinnati and Columbus, Ohio, Agean began navigating store closures and curbside pick-ups in April. Around the same time, Bolte found a Cleveland commercial property for lease at a surprisingly affordable price.

“The perfect opportunity presented itself,” Bolte says. The lease was signed in April, and the Cleveland showroom was open by June. “It was the fastest process by far that I’ve ever had.” While this location is only temporary — it’s small and Bolte is already looking for a new space — he says it’s a great option for testing the Cleveland market, and he has a trusted employee running the new location.

Sonoma Hot Tubs & Pool Supplies in Sonoma, California, had a similar journey. The company was able to move its warehouse, tripling the space available, in June.

President and CEO Thomas Rosander says he’d been looking for a bigger warehouse for years. He was working with a local realtor who repeatedly told him nothing was available: In wine country, affordable warehouse space gets snatched quickly. On a whim, Rosander browsed Craigslist; soon after, he signed a lease on a warehouse that will cover Sonoma’s space needs for five to 10 years. While he didn’t pay a premium or a discount for the property, Rosander says he is paying fair market value.

Others are still looking for the right spot. Brian Quint, senior vice president of Aqua Quip, with 10 locations in the Seattle area, seeks retail space to relocate an existing store that’s a few months from lease renewal.

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“There is going to be a lot of vacant space with retail capacity that should lend itself to opportunities for aggressive lease rates based upon what I’ve read,” Quint says. “I continue to stay active in the market we want to relocate in. I’m expecting some softness in the market, but I haven’t seen that yet.”

Bolte believes more commercial properties will become available because of the pandemic’s devastating affect on many food service and travel businesses, such as rental car companies. In fact, one of the places he’s scouted for his permanent Cleveland location is a recently closed restaurant: He says it’s the ideal size and would be on a main road.

The store Quint is considering for relocation is five miles from a Boeing 787 plant; there are rumors of Boeing consolidating to South Carolina. “If that happens, 40,000 jobs will go away and it will have a direct impact on the lease market,” he says. “I’ve decided to drag my feet about renewing that lease until there is more on this Boeing news, because I think there will be opportunity to renew at an aggressive rate.”

Rosander says it is a little early in the pandemic aftershock for there to be a dramatic softening of commercial real estate prices across the board, but he does expect commercial space to become more available. “Employers realize they don’t need to have everybody in the office,” he says. “I think that’s going to hurt the commercial real estate industry quite a bit.”

He adds that, since consumers have favored buying via Amazon and through delivery services, commercial properties that were once small mom-and-pop retailers and strip malls may become more available as well. “Building owners are going to need to accommodate for this shift in buying power and lower their rents,” Rosander adds.

As spa dealers look to expand during coronavirus, Bolte says it’s about more than a cushy commercial market. “The business needs to be in a spot that it can comfortably weather a one- to two-year economic downturn,” he says. “If the company has that ability, now is a great time to consider expansion. But if they’re looking to jump without having some financial backing, you don’t want to be opening on a shoestring budget and hoping the market stays like it is.”

Rosander favors a real estate rule that advises looking at 100 properties and making an offer on one. By that time, he says, “you’ve gotten a good lay of the land and you know a good deal,” he says. “Don’t rush into anything.”