Retail landlords artificially inflating space

Owners adopting “loss factor” to increase rentable square feet

TRD New York /
May.May 20, 2016 07:30 AM

As if the astronomical growth in retail rents over the past couple years wasn’t enough, some landlords are now inflating how many square feet tenants pay to rent, insiders say.

The move is straight out of the office leasing playbook. Office landlords measure rentable space using an opaque system known as loss factor, which allows them to include the building’s common space — such as hallways and stairwells — in the measurement of the unit, resulting in a space that is up to 30 percent larger than the actual space if measured wall to wall.

But while loss factor is common practice in the office leasing market, with both tenants and their brokers clued in, the stated industry standard in New York is that there is no loss factor in retail — measured space should essentially be a wall-to-wall measurement.

The push to introduce loss factor into the retail market comes as investors fought to pay top dollar for retail spaces after seeing a surge in rents over the last few years. Asking rents on Broadway in Soho, for example, leaped to $890 per square foot in 2014 from $498 in 2011, according to data from the Real Estate Board of New York.

“I think it has become the norm for a quote [from the landlord] for retail square footage to have some loss factor,” said Robin Abrams, a retail broker for the commercial firm Lansco. “There is no absolute standard anymore.”

Before 2014, retailers generally adhered to REBNY’s guidelines, which call for spaces to be measured from the outside of street-facing frontage, the inside of non-frontage walls, and the middle of walls that abut another selling space in the same building. That’s according to Fatos Soykan, an executive at Real Data Management, which measures spaces for the city’s biggest landlords. She noted the first requests for loss-factor retail measurements came in April of that year, but declined to name the clients making the push.

“Since 2014, we’ve been seeing more and more clients asking for two sets of calculations, including and excluding non-street fronting walls in retail calculations,” Soykan said.

“The difference in usable calculations may add up to hundreds of square feet,” she added. In a 2,000-square-foot unit for example, loss factor could add 10 percent more space, and “depending on the type of building and the wall thicknesses this number can be even higher.” That may not sound like much, but given how much retail tenants pay for space, the difference can add thousands of dollars to their rental bills.

REBNY declined to weigh in on whether the trend was good or bad for the industry. In a statement, the city’s top trade association took a hands-off stance.

“These recommended methods are offered to REBNY members to use in their space negotiations,” Michael Slattery, senior vice president for the trade association, said.

The most valuable measurement creep is in the non-frontage wall, which in some old buildings in Soho can be several feet thick, thus significantly inflating the rentable space.

“There are some landlords who are going to the outside face, for retail,” said Jorge Acosta, a principal at Measure UP, which also counts major landlords among its clients. But Acosta said he’s had landlords asking for such measurements for years.

Another change after the recession, according to Acosta, is that landlords are having retail tenants shoulder more of the responsibility for common space they have access to, rather than simply include that space in office loss factor. That’s because if the retailer is sharing the burden on a price per foot basis, the landlords can rake in much more than they would from their office tenants, who pay lower rents per foot.

Jason Pruger, a top retail broker at Newmark Grubb Knight Frank, said since the market heated up, landlords became more aggressive with measurements.

“Since time immemorial,” Pruger said, “people try to push the envelope to their advantage.”

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