Demise a 12,000 sf anchor bay into six small suites, or hold out for one user?

Question

Take a small center, 22,400 sf, six bays. The largest is 12,000 sf and the soft goods tenant in it goes month to month in March at $8.25 net. They have said they are done. Inline space in that kind of submarket trades at $19 to $22 net for anything under 2,500 sf, and the owner has had two service operators and a taco concept ask for 1,600 to 2,000 sf in the last year. Nobody has asked for 12,000. Splitting it runs roughly $310k. Demising walls, six separate services, restrooms in each suite, a grease line for one of them, plus TI allowances somewhere around $30 to $45 per foot depending on the use. Call it a two year lease up. Rent goes from $99k to something like $220k gross of the new CAM load if it all fills. Holding out means keeping the box intact, carrying it dark at maybe $38k a year in taxes and insurance and minimum maintenance, and waiting for a discount user or a medical tenant who wants the whole footprint. Those tenants exist and they sign long. They also do not show up on a schedule. The smaller footprint trend says split it. The banker's answer is usually not to spend $310k on a center worth what this one is. It is the kind of decision that flips every week, and the room's read on it would be useful.

laurenkim53 · Answer

In most secondary markets the 12,000 sf user basically does not exist anymore, and when one appears it is a church or a thrift operation offering half the asking rent on a three year term. The small suites lease. A common outcome looks like a strip in a town of 6,000 filling four 1,500 sf bays inside a year with a nail place, an insurance office, a vape shop and a barber, all paying more per foot than the old anchor ever did. Turnover is higher and you are writing four leases instead of one, so it is real work. Thicket, the number worth having before deciding is what the utility separation actually costs, because that is where these budgets blow up.

karen_whitfield · Answer

Hollow makes the leasing case well, and I'd still push back on the timing. You have a tenant paying $99k until March and no vacancy cost yet. Spending $310k on speculation, before a single letter of intent is signed, converts a stabilized asset into a construction project. I've held land through worse waits than a dark box. If two of your three interested operators will sign leases contingent on delivery, split it. If none of them will commit on paper, that is the market telling you the demand is conversational. Patience costs you $38k a year here, which is a cheap option compared with a half leased shell.

Demise a 12,000 sf anchor bay into six small suites, or hold out for one user?

2 replies