Real Estate Execs See Increase in New Small Businesses and Franchisees Interested in Opening Retail Stores
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| Budding Small Businesses and Franchisees Could Spur Retail Real Estate Activity |
With unemployment at an all time high and even former top level executives and experienced managers among the ranks of the unemployed finding it difficult to secure comparable employment, it appears many are making the decision to become their own boss. And quite a few appear to be looking at vacant storefront space as part of their new career plans.
In mid-April, American Express confirmed the "can do" attitude prevalent among small business owners when it announced the results of its semi-annual Small Business Monitor survey, which revealed that 47% of retail small business owners have an "optimistic outlook on near-term business prospects", 30% "feel the current economic environment creates opportunities" for their businesses, and 32% have capital investment plans. American Express OPEN president, Susan Sobbott said these results are suggesting "a rebound in business owners' perspectives and their renewed focus on finding the opportunities even in our battered economy."
John Bemis, director of leasing for Jones Lang LaSalle Retail, has worked through five recessions and said that, in each one there has been a surge of unemployed executives starting their own retail business. However, Bemis told CoStar he's seeing it "more so this time around because this recession is running deeper and longer than the previous two."
New businesses and franchises in retail are more prevalent because of the lower barriers to entry and a greater number of opportunities in comparison to other industries, said Bemis. "Cost of entry into most retail franchises is under $250K, the market for franchisees has expanded, available real estate has increased, and the cost of real estate has gone down," he explained.
Steven Gartner, president of Metro Commercial Real Estate said that his firm has definitely seen a pickup in interest from new small business owners either looking for space or tenant representation services over the last two months. "More so from independent entrepreneurs than from the franchise operators," he added.
"The entrepreneurial spirit is alive and well and the non-economic barriers to entry are low. There are lots of available sites, a major technological skill set is not required to open a franchise or small retail business, and in today's market, you can get employees fairly easily. In essence, many of these people are buying a job," said Gartner.
That may bode well for the economy. Last month, in recognizing National Small Business Week, President Obama called small business owners the "engine of our economy," citing statistics showing that small businesses created 70% of the nation's new jobs over the past decade. "Their contributions are necessary to rebuild our economy and small businesses will lead the way to prosperity in today's challenging economic environment," concluded the President.
FRANCHISE / SMALL BUSINESS STATISTICS
"Historically, franchises have continued to grow straight through the recession," said Darrell Johnson, president and chief executive of industry research firm, FRANdata, in a recent interview with the Palm Beach Post. Franchisors see that as experienced and qualified business people get laid off mid-career, the pool of strong franchisee candidates grows. According to the International Franchise Association (IFA), franchising grew more than 18% in the four years following the last recession of 2000 - 2001.
At the end of 2008, there were about 865,000 U.S. franchise establishments (approximately 17,700 new units) that generated nearly $839 billion in annual revenue, and created employment for nearly 9.8 million people. The retail industry is unequivocally privy to the most new small business starts ups or new franchisee units.
United Franchise Group, which franchises many brands, recently reported that inquiries in its franchise concepts are up about 40% over last year and during the month of February, the company sold more franchises than it had during any month since early 2007.
Despite interest from franchise candidates being on the rise and franchisees opening stores at faster rates than national and regional corporate retailers, the number of franchise units is predicted to decline net 1.2% in 2009 (a loss of approximately 10,380 net units), while jobs created by franchisees are predicted to drop 2.1%. Additionally, franchise revenues are predicted to drop only .5% during 2009 -- a sign that those that did fail were underperformers anyway. These are mild predictions when considering that retailers operating across all platforms continue to drop off the face of the retail landscape.
In a slightly positive sign, the SBA said there were 15.5 million self-employed individuals in the U.S. at the end of March, compared to 15.4 million at the end of 2008, representing an increase of 100,000 self-employed persons.
REAL ESTATE AND SMALL BUSINESSES / FRANCHISES
Javelin Solutions, a company that specializes in representing franchisees in site selection, made a presentation at ICSC RECon titled, "Franchises Offer New Uses for Retail Space." In the presentation, Javelin argued the important role franchisees play in retail real estate. The firm calculated that franchising accounted for 36% of total retail absorption during 2008, or nearly 29 million square feet of space. FRANdata estimates that 12,000 new franchise establishments will open in 24 million square feet of space during 2009.
With expansion by national and regional retailers substantially depleted, landlords have become not only more willing to lease retail space to new business owners, but are also more willing to negotiate on rent and lease terms than they were in recent past, said both Bemis and Gartner. Javelin said that franchisors are actively seeking aggressive lease economics and "healthy" tenant improvement allowances.
Bemis said getting involved with franchisees is often perceived as lower risk, "if they're tied in with a national franchisor, the upside for the landlord is knowing the store will be professionally designed and implemented, but then its up to the franchisee. We still have to do our due diligence to make sure the concept fits and that the person is qualified financially and has the management experience."
Landlords are also more willing then before to help the new franchisee or business owner get open, said Bemis, with the caveat that this depends on the landlord's confidence in the concept and the business owner. "Where a couple of years ago, the might not have considered a tenant improvement allowance, today there may be dollars in the form of free rent [maximum is typically three to six months]." Both Bemis and Gartner said, however, that actual monetary contribution by the landlord to the tenant to fund build out costs remains rare, particularly because the "TI pool has gotten smaller," for most landlords, said Gartner.
Gartner said that landlords' willingness to consider these business owners has improved somewhat because "they've gotten a little burned by these national retailers becoming not all they were cracked up to be." However, said Gartner, "Landlords never just 'took a shot' at a local and they're still not. They're being appropriately curious and their determination is not only based on tenant credit, but the concept and business acumen, as it always has been."
Another area landlords are changing their tune on is term, said Bemis. In the past, landlords would usually scoff at new business owners requesting short-term leases (i.e., under 3 years) to lower their risk while determining if their business makes sense to continue. Now however, landlords are more likely to sign these businesses into temporary leases, said Bemis, "It is not profitable for the landlord to enter into long term lease deals with people who aren't going to be successful." Landlords are also considering that market rents and competition for vacant space could be significantly improved by the time renewal comes along for these tenants.
As more prime retail spaces become available at affordable lease rates, franchisees and small business owners are seizing opportunities to lease spaces that were previously not an option for them. The good news for landlords is that many franchisees sign multi-unit development contracts and are actively seeking simultaneous site openings in expansion markets, said Javelin -- this means one qualified franchisee could translate into filling numerous spaces.
Additionally, new small businesses often bring unique new concepts to tired shopping centers, contributing to a much-needed revival. Bemis recently said that historically well-occupied shopping centers may look drastically different after this recession. A big percentage of centers, says Bemis, have gotten too "cookie cutter" and bringing in these new franchises and small businesses will bring the "local flavor" that shoppers crave back into their shopping centers.
Javelin recommended five primary ways to attract franchisees to your available spaces, including joining the IFA and attending industry conferences. Landlords should be proactive in researching and identifying franchise concepts that would be ideal for their available spaces and should establish relationships with and send possible sites to the franchisors' real estate directors, advised Javelin's panelists. Perhaps the most unusual recommendation was to use vacant space to advertise for franchisees.
Typically, franchisees select the sites, which go under review by franchisors. Recently though, Bemis said that JLL has teamed up with a couple franchisors to pre-identify locations; the two then co-market the spaces to the franchisee public. "We believe that working in conjunction with the franchisor, we'll be able to help identify opportunities for them and move the process along -- it's a great initiative," said Bemis.
"For people who are taking the risk of starting their own business, this is a good time to do it because we're on the back side of the recession and they can still get good locations at reasonable pricing," concluded Bemis.
FRANCHISE / SMALL BUSINESS LENDING
While individuals may increasingly be looking to start new businesses or become franchisees, the lending market continues to hamper their ability to obtain financing or round up investors, decreasing their ability to bring their concept to fruition. According to FRANdata, the average franchisee spends $100,000 in startup costs, which is hard to come up with in this market.
According to a study released May 12 by FRANdata for the IFA, franchise lending in 2009 is expected to be down 40% in comparison to last year. The report showed that historically, for every $1 million of franchise lending, 34 jobs are created and $3.6 million in annual economic output is realized; a 40% reduction would constrain potential growth and slow our economic recovery, said the IFA.
Two of the industry leading lenders, GE Capital and CIT Group have reduced their lending enormously; with this, SBA loans will account for more franchise funding than in the past, especially with the recent government funds funneled into the division.
Bemis said that from his experience with franchisors, he hypothesizes that while lending restrictions likely have franchisors' ratio of number of prospects to number of franchisees opening stores down, the increased number of inquiries is keeping up the franchisor's expansion.
In this tight market, franchisees and small business owners will continue to be driven by personal (including use of 401Ks and severance packages) and some private financing (mostly by friends and family, as the number of venture capital deals was down 45% in first quarter, compared to first quarter 2008). If financing restrictions persist, potential franchisees and small business owners may be deterred from proceeding with their ambitions; but when financing does thaw, Javelin predicts that the franchise industry will start to take an enormous amount of surplus retail space.
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