Spokane bucks small business rent-delinquency trend
Some starting leases have begun to increase
Karina EliasAugust 25th, 2022
Commercial real estate industry experts in Spokane say that although a rise in commercial rent delinquencies is being reported across the country, Lilac City’s small businesses have proven resilient, bucking national trends.
According to the report by Boston-based Alignable Inc., a social networking platform for small businesses, nearly half of all restaurants and transportation services surveyed reported they were unable to pay their July rent in full or on time.
Many who were surveyed pointed to soaring inflation, including escalation in prices for rents, gas, supplies, and transportation.
In Spokane however, industry leaders say small businesses have found ways to stay afloat.
Jason Jackson, director of commercial management division for Spokane-based Kiemle Hagood says Spokane has been more resilient recently than had been expected.
Actual delinquency across the company’s entire portfolio is under $30,000, Jackson says.
“We manage 15 million square feet of commercial space,” he says. “That’s a tiny amount of delinquency.”
Jackson says, since the onset of the pandemic, Kiemle Hagood has worked with landlords and small businesses to help them stay in the buildings through different payment options and generally staying vigilant of patterns of late payments or partial payments.
That vigilance over the last couple of years has been an effective management strategy that has helped people stay in their spaces, he contends.
Nicolle Hansen, Women’s Business Center manager at Spokane Neighborhood Action Partners Financial Access, says she hasn’t heard much from clients related to changes in their current leases or that their monthly rent is rising. However, she’s hearing from some first-time small business owners about a scarcity of affordable rates when entering into new rent agreements.
“If they have a month or two of sales that are below target, they can then be put into positions where they would need to increase prices or cut back hours for staff,” she says. “Either way, there is a ripple out in the community.”
Jackson says it’s largely true that, initial lease rates are going to be higher in the current inflationary economic environment. He adds that landlords have maintained relatively flat commercial rents for many years, and he’s starting to see real pressure to raise rents as other costs rise.
According to the fall 2021 survey of commercial office and retail space in downtown Spokane conducted by Spokane Valley office of Valbridge Property Advisors, average annual prime Class A rents were $20.67 per square-foot, level with the year-earlier rate. Lower tier Class B rents were $16.96 per square foot, up slightly from a year earlier, and Class C rents were $13.68 per square-foot, up over $1 per square foot compared with a year earlier.
The survey is a compilation of commercial rents that include properties managed by Spokane-area commercial real estate companies Kiemle Hagood, NAI Black, Goodale & Barbieri Co., and Crown West Realty.
Those rates have not changed much in recent years as reports from the past three years reflect sluggish movement in prices. Rents are likely to be significantly higher when the report is published again in November, representatives from Valbridge caution.
In addition, many landlords are now passing through tax increases and maintenance costs to tenants, a trend that Jackson says is happening in many cities. The rental increases that a landlord receives on an annualized basis might not keep up with current rising costs, he adds.
To that end, Jackson says, “Point of entry is tougher. Class A spaces are getting pricier. Class B, and C are still reasonably priced but beginning to see some price increases.”
Jackson says that the price points for commercial rents that were in place pre-COVID have increased by anywhere from 10% to 25% in Kiemle Hagood’s portfolio—rates not yet reflected in the commercial property survey.
While Spokane’s small businesses mostly have avoided falling behind on rents, others in the industry think it is possible that the national delinquency wave has not yet reached in the Inland Northwest.
Chris Bell, commercial real estate broker for Spokane-based NAI Black, says that while Spokane has benefitted from in-migration, becoming one of the fastest growing cities in the country, he’s expecting a rise in commercial rent delinquencies.
Bell says that Spokane generally falls about eight to 12 months behind the national economic trends. When he notices problems with vacancies in Los Angeles or San Francisco, they work their way up to Portland, then Seattle, then to Spokane he explains.
“That’s what I’m expecting, and what I’m bracing my clients for,” he says. “Be prepared … because the storm is coming.”
Like Jackson, Bell is advising clients to be vigilant of tenant payment patterns and help those small businesses stay in their buildings by working with tenants to solidify leases.
Bell, who has been with NAI Black for 17 years, points to the cyclical nature of economic recessions. “The reality is we have seen recessions before,” he says. “History has a way of repeating itself.”
Bell says NAI Black has no industrial space vacancies in its portfolio, and, depending on the sector within commercial real estate, NAI Black has little available space.
Small-bay warehouses, ranging from 3,000 to 10,000 square feet, historically have been in highest demand in Spokane, he says. However, nobody is building this type of warehouses due to rising construction costs.
“You can’t rent them for what it costs to build,” he says.