Is Bigger Better? Space vs. Sales
Be wary of leasing agents who try to foist too much square footage on you
Does leasing a larger commercial space lead to increased business? Not necessarily! In fact, bakery tenants often find that a larger commercial space results in a bigger problem that they are not profiting. When they come to The Lease Coach stating that they are not making any money because their rent is too high we have often discovered that, more often than not, the baker has simply leased too many square feet.
We remember consulting to a client leasing 8,000 square feet of space who couldn’t afford to pay the rent. When we checked with neighbouring tenants, it turned out our client was actually paying less per square foot than anyone else. It wasn’t the rent per square foot that was killing his business but the amount of area he had been talked into leasing by the landlord’s leasing representative. We regularly see this scenario … leasing representatives and real estate agents, typically, receive a commission from the landlord for signed lease deals (the incentive increases with a tenant signing for a longer term, agreeing to pay a higher rent or leasing more space); however, the unknowing tenant often signs the lease agreement and becomes legally bound to the terms. Additionally, in most cases, you will also be paying operating costs or common area maintenance (CAM) fees based on a square-footage basis.
Occasionally, we deal with the reverse of this scenario. A tenant told us his space was too small. If we could expand the business, he could generate more revenue. We negotiated for this tenant to lease the adjacent space (which meant relocating the neighbouring tenant) and he achieved his goal. Landlords, generally, prefer to work with a tenant who wants to expand versus one who needs to downsize.
It has been our experience that the main reason bakery tenants end up leasing the wrong amount of square footage is due to availability or lack thereof. If you need about 1,200 square feet for your bakery but the only two spaces remaining available for lease are smaller and larger, you will have a dilemma. A smaller space often has less frontage as well. This gives you less storefront exposure – which can be critical for your type of business, because reduced frontage results in reduced visibility for customers.
When choosing between locations that are too big or too small, bakery tenants should almost always decide which space is better located. With adjacent and very comparable units, we would normally advise the tenant to be more conservative and lease the smaller location. Tenants who tell us their location is too small are usually profiting but want to expand to increase their sales. Whereas tenants who tell us their location is too big often want to downsize to reduce rent payments as a means of improving their bottom line.
On a related note, consider also the functional shape of the premises for your bakery. In one situation, the landlord was expanding his strip mall claiming that only one commercial retail unit (CRU) was left. Unfortunately, this unit housed a large utility room in the back – making that area unusable for almost any tenant. Since the expansion portion of the project was only in the construction phase, we suspected the landlord still had time to move other newly interested tenants around and suggested to the tenant we walk away from the deal as a negotiating strategy. As expected, within a few days the landlord reconsidered his position and predictably came up with a much better location for the tenant.
When it comes to leasing commercial space, choose wisely and recognize that bigger is not always better. If you have too large of a space, you might not only be paying too much rent, but you might end up with routinely empty tables. If you have too small of a space, you might be squeezed in and manoeuvering around could become difficult.
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