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SMALL BUSINESS

Growing firms benefit as hard times soften rents

Independent restaurants and other companies are taking advantage of cheaper retail and office space to expand.

May 24, 2010|By Cyndia Zwahlen

Lower rents are the economic downturn's silver lining for those Southern California small businesses that are growing and looking for places to expand.

Joe Kim, the chef-owner of the Flying Pig gourmet taco truck, is checking out new locations. He's working on opening two restaurants in downtown Los Angeles at places he wouldn't have been able to afford before the economic downturn.


FOR THE RECORD:
Small-business rents: An article in Monday's Business section about lower retail rents for some small businesses in Southern California identified Aaron Jodka as a senior real estate economist in the Los Angeles office of CoStar Group. He is based in the firm's Boston office. —

Independent restaurants, gyms and office-based firms are some of the local companies that are taking advantage of cheaper rents to open second locations, move into bigger space or relocate to premier addresses they couldn't previously afford. Sometimes, they find, rents are being cut up to 50% off recent highs to get tenants.

The surplus of ready-built, empty commercial space also means small businesses pay less to set up shop than if they had to build new interiors, real estate brokers said. Some small firms are even finding it cheaper to buy a building than pay rent.

The combination of lower rents for retail or office space and the stabilizing economy has created a window of opportunity for small firms that have survived the recession and are able to grow, industry experts say.

"We are right on the beginning of that trend," said Aaron Jodka, senior real estate economist in the Los Angeles office of CoStar Group Inc., a real estate data firm.

The change is part of the shifting commercial real-estate landscape in the Los Angeles area, where smaller firms step in as large national tenants such as Starbucks close locations and delay expansions.

Since 2007, the vacancy rate for retail space in the area has doubled to 5.3%, while average rents have slid 8% to $27.50 a square foot annually, according to CoStar data.

In Orange County the retail space vacancy rate doubled as well, to 6%, while rents have dropped 20% to an average of $23.98 a square foot over the same time.

The Flying Pig's Kim said he was offered 50% off a 10-year lease for a full-scale restaurant at 4th and Main streets downtown and 30% less for a smaller space nearby.

"When the recession comes up, there are always pros as well as cons," said Kim, a graduate of Le Cordon Bleu culinary school in Pasadena and a part-time building contractor who launched his mobile business last fall.

In Huntington Park, Tierra Mia Coffee Co. is opening its second location and adding nine employees, in a former McDonald's, just in time for the company's second anniversary.

Founder Ulysses Romero has been looking at restaurants and coffeehouses that have gone out of business because he figured it would cost him less to open in such a location.

His new coffeehouse took two months to complete compared with almost a year for his first spot, in South Gate. And it cost about one-third less to remodel, he said.

"There is just a huge inventory out there to take advantage of," Romero wrote in an e-mail. He hopes to open a third location within a year.

At the same time, the credit crunch, though beginning to ease, still makes it difficult for small firms to borrow the money they need to expand. And brokers said many landlords and their bankers are still holding out for the higher rents they need to cover loans made when commercial real estate was booming.

But the shrinking pool of big-name tenants is changing the minds of some landlords, said Derrick Moore, a vice president and retail broker at CB Richard Ellis in Los Angeles. Some are actively courting local small businesses with proven business concepts.

"There are a number of factors that actually all work in favor of that small-business owner that didn't exist before," he said.

Broker Paul Matysek agreed. Landlords "are definitely looking at applications now from tenants" who are smaller, said the senior associate at Grubb & Ellis in the South Bay. Three years ago, the smaller potential tenants "wouldn't have even been able to even talk to the landlords."

smallbiz@latimes.com

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