An arm and a leg per square foot?

November 16, 2007
By

DAVID TABER

Local business owners struggle with rising rents

Small business owners, particularly in the heart JP’s busy Centre Street commercial district, have voiced concerns in the last few months that some landlords are testing the outer limits of what rents the market will bear.

Commercial rents have been the main topic of conversation at the last two monthly Jamaica Plain Business and Professional Association (BAPA) board meetings.

BAPA member Laurie McKeown, a lawyer with an office on Centre Street who regularly advises business owners and landlords regarding commercial leases, said some of the rents discussed at the meetings resemble “Newbury Street prices,” referring to the upscale downtown Boston commercial district.

The characterization of prices as Newbury Street-like, which no one the Gazette interviewed for this article disputed, may be somewhat of an exaggeration. Business owners in prime locations, according to McKeown, report paying more than $40 per square foot (PSF). Prime downtown retail space ranges from $65 to $150 PSF, according to a 2004 citywide commercial rental market study conducted by OKM Associates and made available to the Gazette by the Jamaica Plain Neighborhood Development Corporation (JPNDC).

But McKeown and others say that many business owners are reporting feeling the pinch, and some say they were or may be forced to close or move due to rent pressures.

The political and economic dynamics of neighborhood commercial districts are complex. At the end of the day, it is hard to trace back all of the factors contributing to the particular combination of retail businesses, restaurants and offices that end up on a commercial block.

JP is generally politically inclined and organized to maintain vital independent business districts. Efforts of the area’s handful of Main Streets groups and business associations, as well as the JPNDC, to promote local independent businesses have had widespread public support.

“Our business owners are hardworking people. The community can relate to them. We live in a community where everyone knows each other. That’s what make JP strong,” said Alison Moronta, business development project manager at the JPNDC.

A recent hike in rents by some landlords may stem in part from the community’s success.

“Some landlords are trying to capitalize on what they might see as Main Street’s progress in making the business district better,” Emily Haber, executive director of Boston Main Streets admitted. When it started 12 years ago, some critics feared Boston Main Streets would be a tool for gentrification, she said.

Main Streets works to facilitate the revitalization of the City’s neighborhood commercial centers after decades of divestment. Its goal has always been to “strengthen the businesses that are there, so when conditions improve they are in a position to benefit,” she said.

Boston Main Streets has proved adept at its mission and “being accused of causing gentrification is not an issue,” she said.

There is no doubt Jamaica Plain Centre/South Main Streets (JP CSMS) has been a boon to the bustling business district. Through its popular monthly summertime First Thursdays district-wide festivals, and regular surveys and studies of the desires and needs of the community, JP CSMS has helped create a vital business district many residents feel a strong connection to.

The OKM report states that in 2004 the highest reported retail rent in the Centre/South district was $35 PSF, with the average being somewhere in the $25 to $35 PSF range.

These figures “attempt to approximate a triple-net calculation,” the report says. Triple-net, or “net, net, net,” leases oblige commercial renters to pay utility costs, real estate taxes and sometimes other expenses in addition to their PSF rates. While it is unclear whether the high rents McKeown and others describe are triple-net or not, experts agreed that the inclusion of other costs can make commercial leases hard to compare or even to understand.

One Centre Street business owner, who agreed to speak to the Gazette on the condition that his name be withheld, said that after a short time in business he is starting to regret signing his lease. He is paying $33 PSF and is liable for utilities and taxes, he said, and his rent is increasing six percent per year.

He said he recently got his first water bill from his landlord. He wouldn’t say what it cost, but he found the number distressing and the bill unclear.

BAPA member Bob Franklin, another Centre Street-based attorney familiar with commercial real estate issues, said leases normally include triple-net or an annual percentage increase to cover utilities and taxes, but not both.

“It’s an irrational argument [for a landlord] to say they are entitled to both,” he said.

But the Centre Street business owner cannot say he was not warned. “I went to a lawyer with this bulky lease, and her first reaction was, ‘This is not a good situation,’” he said. His lawyer said she was paying less for office space in Chinatown, he said.

Even though he knew his lease was a bad deal, he felt obliged to sign it anyway, because commercial space in JP is limited and, “I knew that folks were lining up behind me,” to take the spot, he said.

McKeown jokingly described this as the “greater fool theory.” If a landlord waits around long enough, she said, someone foolhardy enough to agree to his or her terms comes along..

Both Franklin and McKeown own the buildings that house their offices, and rent out commercial space in them. Determined to lease his space to a restaurant or retail interest, Franklin said he was approached by a number of businesses looking for office space, but it took him months to find a suitable tenant before the boutique Fire Opal moved in.

“What I think is the case is there is a false perception that there is a tremendous amount of pressure for space,” he said.

McKeown pointed out, however, that in JP, “We have very little square-footage of retail business space on the ground.”

While JP’s commercial districts along South, Centre and Washington streets stretch for miles, they are broken up in many places by residential blocks. They are also universally narrow, directly abutted in the rear by residential neighborhoods.

High residential property values may also create the impression that JP is more affluent than it actually is, McKeown said.

According the City of Boston’s 2006 real estate trends report, the median sale price for single family homes in JP last year was $549,500, significantly higher than the citywide median of $370,000. The median for all residential properties in JP was $358,000, slightly lower than the citywide median of $382,000.

According to the Gazette’s analysis of 2000 census data, JP is more affluent than Boston as a whole, but over 50 percent of the population made less than $50,000 a year at the beginning of the millennium.

But the perception of affluence “creates an aura that mom and pop stores are going to make a fortune,” McKeown said, “Landlords don’t want to be chumps. They don’t want to be the ones who didn’t charge enough.”

Karl Seidman, a senior lecturer in Economic Development at MIT’s Department of Urban Studies and Planning, said housing prices, “might have some relation to commercial rent if the prices relate to high-income residents living there.”

But there are plenty of other factors landlords should consider in determining reasonable lease rates, he said. Whether businesses rely more heavily on local clientele or shoppers from other communities and how much foot traffic passes a particular storefront should also be considered, he said.

McKeown also pointed out that restaurants, which serve clientele on a daily basis, can expect to generate more income than most retail establishments. “How often do you need a kitchen gadget?” she said, in apparent reference to the Centre Street store Gadgets.

Seidman said being able to charge higher rents for restaurants and other higher-margin business makes landlords less inclined to rent to other retailers. “If you have an optimal mix you may well have 10 different businesses that pay different prices,” he said. It is sometimes hard to convince property owners that they will benefit by promoting a mix of businesses, he said.

Despite all this, Haber said, JP’s business districts are more stable than most. “Business districts are always changing…but you have a lot of businesses that have been there for a long time,” she said.

“Probably the political consensus is that [Centre/South] should stay as it is—non-chain, retail-type businesses and restaurants,” McKeown said.

This political consensus will likely sustain an independent business district, she said.

Historically, JP has opposed chain stores moving in. Domino’s Pizza, Kmart and Papa Gino’s stores have all mounted failed bids to open here in the last 20 years. Rumors that a D’Angelo’s sub shop was considering opening in the old Videosmith location at 672 Centre St. met with widespread opposition and no formal plan ever materialized.

Beyond opposition to chains, that political will may be manifesting itself in new strategies for self-organization among Centre/South’s commercial tenants.

BAPA is, at the very least “committed to sharing information,” regarding the local business climate, McKeown said.

Franklin said he could see the effort potentially going beyond that. “Why [can’t business owners] form co-ops and develop financing to acquire the building?” he wondered.

While it would be a lot of responsibility, Franklin said he imagines a
group of established business owners could acquire financing “at a reasonable price or even at a premium,”

For this or other efforts, there is little doubt JP business owners have support. JP Centre/South Main Streets stands ready to connect small business owners with city resources through the Boston Business Assistance Center, Haber said.

And the JPNDC’s small business program has connected local businesses with over $6 million in financing since 1997, said Moronta. The JPNDC also provides one-on-one consultation to help with developing business plans and access to legal services when business owners are looking to renegotiate their leases, Moronta said.