Don't like rising rents? Buy the place

Share

Stephen Spencer's store - a temple of good taste filled with high-end Italian furniture and modern paintings - was flourishing in its art-gallery-row location in Vancouver in spite of the recession.

Buyers inclined to spend $10,000 for a sofa or $1,500 for a lamp were still keeping his staff at Spencer Interiors busy. More important, sales were booming through his international online business, which helps the world's wealthy furnish their fourth or fifth homes quickly.

So when it came time to renew the lease at the store with the 23-foot ceilings where he'd been since he opened six years earlier, Mr. Spencer thought long and hard about whether he wanted to keep paying the $12,000-a-month rent.

Although $30-something a square foot is a reasonable rent in Vancouver's high-priced commercial real estate market, there was a strong chance that rents would skyrocket in the area. That has happened in several Vancouver commercial neighbourhoods in the past 20 years as they've gone from funky industrial (Yaletown) or moderately hip (Fourth Avenue in Kitsilano) or ethnic and alternative (Robson Street) to ultra-trendy and expensive.

Mr. Spencer decided he would buy his own space instead.

"The benefit for me is that it helps us weather any storm, it reduces the overhead, it makes us more competitive," said Mr. Spencer, sitting back on one of his sleek grey sectionals, outlining his business strategy on a quiet Saturday evening after the store had closed.

Commercial broker Craig Haziza says more and more businesses owners are contemplating similar moves.

"We're seeing businesses throughout Vancouver that were historically tenants who are starting to buy because it gives them long-term stability," said Mr. Haziza, vice-president for retail services at Cushman & Wakefield in Vancouver.

Low mortgage rates, a healthy supply of retail units throughout the region, and fear of rapidly rising rents are all factors that have played into the trend.

In the past four years, sales of commercial space to retailers planning to operate businesses there have accounted for $20-million to $30-million in sales a year in Greater Vancouver, accounting for one-half to one-third of all sales of commercial property.

Part of the reason Vancouver in particular is seeing that kind of activity is because it's a small-business city, more so than Calgary or Toronto.

Another factor is new immigrant communities where South Asians, Korean and Chinese developers have created a market for units in mini-malls by selling to business owners in their community who like the idea of banding together to create ethnic shopping enclaves, says Paul Richter, whose company RealNet tracks commercial sales across the country.

Calgary and Toronto aren't immune to the trend.

Amy Chow and her husband bought a building on the Danforth Avenue commercial strip in Toronto three years ago for around a million dollars, with a plan to open a restaurant.

Their restaurant, the Combine Eatery, will open this spring, and Ms. Chow, a bubbly and energetic 40-year-old who is also president of the Danforth Business Improvement Association, says owning the building means she'll never have to worry about being pushed out because she can always rely, in part, on rents from the apartments above.

"I think it's going to be a trend that takes on a life of its own," said Ms. Chow, whose father ran restaurants for much of his life, but always as a renter. "And even if the business doesn't go well, you still own that dirt."

Dan Kelly, the senior vice-president for the Canadian Federation of Independent Business, said he sees businesses more likely to buy in cities that are expanding rapidly - his previous hometown of Calgary is one - not just to give themselves some security but also as an investment.

"Often the value of the business property is greater than the value of the business itself," he says.

But, in spite of all those advantages, it's still not an easy decision for businesses to buy their own spaces. They might not be able to find one the right size or in the right location. Or they might not have the capital to buy.

"It would be a very small group that could buy like that," says Ria Bleumer, the new owner of Sitka Books and Art on Vancouver's popular Fourth Avenue. "It's mostly small spaces that are available, and small doesn't work for many businesses. It doesn't make enough money to pay the overhead." She needed around 3,000 square feet to display a wide selection of books, while many "stratas" -separately owned units of a larger structure - are convenience-store-size spaces, about 2,000 square feet.

Mr. Spencer emphasizes that Vancouver is a tough market for leasing or buying retail space.

"The American chains coming in here see this as a testing lab where they can sell to visiting Asians, so they distort the price because they're willing to pay anything," he says.

Certainly on Robson Street, a once funky stretch known for its German restaurants, bookstores and spice store, chains such as Zara, the Gap, Banana Republic and Roots, willing to pay the top rental rate of $240 a square foot per month, have driven out everyone else.

But for those looking to buy in lower-priced zones, the problem is a shortage of the right kind of commercial space. Much of it is small retail strata at the bottom of condo buildings. In suburban areas, it's small retail strata in mini-malls.

For businesses that need more space than the average convenience store, it means trying to find two or more stratas that can be joined. Or they have to find a large building with multiple units.

Mr. Spencer managed to find four retail strata units with 3,700 square feet of combined space on lower Main Street, a once-rocky area of residential hotels, Chinese knickknack stores and drug users. It's now slowly being punctuated by new housing, restaurants and coffee shops. The Ginger condo development, where Mr. Spencer has bought all of the street-level space, was one of them.

"The most important thing for me was that it had parking. And the colourful aspect of the area doesn't bother me."

Which is good, since he's now committed to being there for a long time - rising rents won't push him out.

Special to The Globe and Mail