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Real Estate - Commercial

Commercial Tenants Navigate Rent Spikes

By Cece Nunn, posted Aug 5, 2022
In some parts of the Wilmington area, not many signs like this are displayed as the inventory of available commercial space remains low in some sectors. (stock photo)
Parker Wilson, owner of a company that makes all-natural cleaning products, unintentionally missed a deadline for letting her landlord know she wanted to renew her lease.
 
As a result, she faced the expensive possibility of having to move the base of operations for her business, SQUEAK, from Netherlands Drive in Dutch Square off Market Street to a new location.
 
In the end, the property owner began working with Wilson on terms that will allow her to stay, she said.

“It’s the perfect location,” Wilson said of her existing space, adding that it’s only seven minutes from her home and is outfitted for SQUEAK’s specific needs. “We have ongoing replenishment contracts with larger retailers like TJ Maxx. If I have an existing purchase order and I can’t fill it, I would lose that contract, completely.”
 
Wilson’s experience is one of the realities small businesses throughout the area face when trying to find commercial space, which also include increasing rents and a lack of inventory.
 
Cal Morgan, a commercial appraiser who owns Wilmington-based JC Morgan Co., said he and his partners own several properties, not affiliated with the SQUEAK space, in Dutch Square.
 
Based on that ownership “and what we have seen performing our appraisal work, rents have increased approximately 25%” over the past two to three years in Dutch Square, Morgan wrote in an email, adding that industrial and office-warehouse space “has had some of the highest rent growth 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, amenities, etc. But commercial real estate brokers agree that industrial rents have been increasing the most. 
 
Some long-term leases for commercial space have built-in, incremental rent increases. Other lease rates are tied to the nation’s Consumer Price Index (CPI), which jumped 9.1% in year-over-year stats released by the federal government in July. The CPI, considered a measure of inflation, measures the overall prices people pay for goods and services.
 
“The shortness in supply with high demand equals higher pricing,” said Nick Silivanch, partner in Wilmington-based Eastern Carolinas Commercial Real Estate (ECCRE). “Industrial flex rents a couple of years back were still in the single digits. Now you’re in the double digits and it’s also for new space.”

Examples of the intensity of industrial demand include North Kerr Industrial Park. A Cape Fear Commercial news release in June showcased the Wilmington-based firm’s work on the park, which is sold out.
 
CFC Senior Vice President Will Leonard brokered the sale of nine industrial park lots during the past year, according to the release. 
 
“Throughout the market, older industrial space available for lower rates has essentially been absorbed,” Leonard said in the release, which was referring to sales, not rentals. “Prospects are now realizing that the newly constructed buildings are well worth the higher rates, based on the efficiencies of higher stacking heights and modern fire suppression systems. All of the current spec buildings in our market are currently at 100% occupancy, with more construction on the near horizon.” 
 
In the office sector, rents have remained more stable, Morgan said, “however, the rise in the cost of new office projects seems to be outpacing rent growth for these properties.”
 
In other words, no one could afford to rent new offices if owners charged enough to cover the current costs of building them.
 
“That’s why you don’t see a whole lot of product coming out of the ground right now,” said Steve Hall, partner in Wilmington-based commercial real estate firm Maus, Warwick, Matthews & Co. 
 
Nevertheless, certain industries are on the hunt for office space.
 
“It seems like the behavioral health groups are really coming out of the woodwork right now. I think they’re getting a lot of funding,” Hall said. “You’ll see some other sectors coming to this market like engineering firms because of all of the building that’s going on in the residential side.” 
 
Bryce Morrison, commercial broker with Wilmington-based Cape Fear Commercial, focuses on the region’s retail market. “The new construction costs for developers have forced the rental rates to go up to make the economics of it work,” Morrison said of the retail sector. “It just makes existing space more valuable.”
 
Wilmington isn’t the only community in the area with a low supply of vacant retail space in the size ranges tenants need. The shortage is also affecting Pender and Brunswick counties, Morrison said.

“There’s nothing up in Hampstead and even Surf City now,” he said. “We have a lot of users looking in that market and there’s just nothing available, and usually when something comes up, oftentimes it doesn’t even hit the market.”
 
That’s because landlords and property managers tend to have a backlog of business owners who have inquired about space that they can reach out to directly without listing a property for lease.

Morrison said the spaces he’s referring to are 3,500 square feet or smaller. Larger spaces, like the Pier 1 Imports stores at Hanover Center and Mayfaire Town Center for example, have remained vacant. In other cases, some larger spaces have been split up into smaller offerings.
 
“Everyone’s trying to figure out how to consolidate and do more with less square footage,” Morrison said.
 
Landlords need to consider whether the economy is experiencing a recession, said John Hinnant, another broker at ECCRE.
 
“You’ve got to remember: The best tenant is the one who’s already paying rent, not the one you hope to get … if they’ve got a good tenant, who’s been good to them, [landlords] need to be patient with this economy, and maybe work with them if they want to maintain a good steady cash-flowing property,” Hinnant said. “With lower interest rates in the past few years, a lot of people were able to reposition their debt and improve their cash flow, and this may not be the time to push the rent envelope if we may roll into a recession.”
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