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

Question

Small center I own, 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've told me they're done. Inline space in this submarket trades at $19 to $22 net for anything under 2,500 sf, and I have two service operators and a taco concept who have all asked me for 1,600 to 2,000 sf in the last year. Nobody has asked me for 12,000.

Splitting it is roughly $310k in my numbers. Demising walls, six separate services, restrooms in each suite, a grease line for one of them, plus TI allowances I'd guess at $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 I fill it all.

Holding out means I keep the box intact, carry it dark at maybe $38k a year in taxes and insurance and minimum maintenance, and wait for a discount user or a medical tenant who wants the whole footprint. Those tenants exist and they sign long. They also don't show up on a schedule.

The smaller-footprint trend says split it. My banker says don't spend $310k on a center worth what mine is. I go back and forth every week.

laurenkim53 · Answer

In my markets the 12,000 sf user basically does not exist anymore, and when one appears it's a church or a thrift operation offering half your asking rent on a three year term. The small suites lease. I watched a strip in a town of 6,000 fill four 1,500 sf bays in 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're writing four leases instead of one, so it is real work. Thicket, the number I'd want before deciding is what your 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 the 12,000 sf anchor bay into six small suites, or hold out for one user

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