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'Survival of the fittest' downtown
A closer look at commercial vacancy
Broughton Street has more than its share of commercial vacancies; some say the dreaded 'triple net' lease is partially to blame

After 18 months of economic recession, Savannah's local economy is reminiscent of Charles Dickens' famous opening lines from A Tale of Two Cities: ‘It was the best of times. It was the worst of times.'

While no industry has remained unaffected by the country's financial woes, there are occasional signs of hope downtown, despite the growing list of businesses that have been shuttered in the last year or two.

"What is happening downtown is a bit of a survival of the fittest," says Heather Burge, owner of Bleu Belle Boutique and Bleu Belle Bridal. "There were so many businesses that opened prior to the economic downturn, and not all of them were bound to make it through these rough times."

Walking down Broughton Street from MLK to East Broad reveals a growing number of empty storefronts, nearly 20 in total, and the list of recent victims of the recession reveals that no particular industry is safe. In the last few months, Broughton Street has lost Aushee (clothing), Harkleroad Jewelers, and Kilwin's (sweets), just to name a few of the dozen or more businesses that have closed or relocated to elsewhere in the city.

Heather Burge just moved Bleu Belle Bridal off of Broughton Street and out to midtown, after two years of business downtown. "The cost of rent certainly played a role in our decision to move," says Burge about relocating her bridal boutique. "However it had more to do with the fact that the new space was more efficient for us."

Like many business owners who've moved further out from the Landmark Historic district, a move away from downtown just made better sense business-wise. "I think business owners are having to re-evaluate our lease situations to make sure they are in our best interest," she explains.

While moving improved business for the bridal boutique, it's not a sign that Burge has lost faith in downtown's eventual recovery, and her original store will remain at its current location on Broughton Street. "There are still so many strong local businesses that are just trying to hold on through this economy," Burge says. "Once the economy picks back up, downtown will continue to thrive for local businesses."

With recovery still a ways off, the loss of small businesses could spell danger for downtown though. Rhett Mouchet, the broker in charge at local commercial real estate firm Melaver Mouchet, sees smaller businesses as the foundation of downtown's economy because of the lack of larger office spaces.

"Buildings that were staying consistently filled up were the ones that catered to the 800 square-foot to 1000 square-foot small businesses," says Mouchet. "Most of the buildings that are in downtown are the nooks and crannies...buildings that are going to attract people who really want to be downtown, or the service industry."

Vacancy rates in commercial buildings are on the rise across Savannah. "We handle the Manger Building on Johnson Square," says David Sink, a partner at local commercial real estate firm Colliers Neely Dales. "I know there are 6 or 8 different spaces that have opened up in the last several months, in a building that has historically remained pretty close to full occupancy."

Although Savannah is home to a lot of small businesses, the limited availability of commercial spaces can make it a difficult environment for business owners. According to a retail market survey of Savannah completed by Colliers Neely Dales at the end of 2008, the average lease rates for smaller retail spaces rose from $19.51 per square foot to $21.47 from 2006 through the end of 2008, remaining nearly double the average cost of larger retail spaces. During that same period vacancy rates rose from 13.14 percent up to 21.21 percent.

The recovery of Savannah's real estate market will depend largely on the ability to retain successful smaller businesses in the short term, because the city hasn't seen steady growth with larger corporations.

"The buildings that lease up the slowest are the really nice corporate buildings," explains Mouchet. "We're just not attracting large corporate users...We were on a pretty good roll for that about three years ago, but that's all come to a halt because of the economy."

The downturn hasn't completely strangled new growth along Broughton though, and newly opened shops like Papillote, Sekka Bicycles and the Blue Goose are all working to carve a niche downtown.

Papillote, a French bistro on west Broughton, has been open for four months now, and co-owner Ann-Marie Apgar seems upbeat about business so far. "The response has been really good, but you never know how a business is doing until you've been in business for awhile," she explains.

While economic woes have people spending less readily, Apgar sees the new restaurant starting to develop some regular customers among people who enjoy food and want to try something new. "People are willing to pay for something that they value as important, and some people view food as important," she says.

Although the number of new businesses opening downtown has slowed, there are several other new spots on or near Broughton that will be opening soon, including a burrito restaurant, T.Rex Mex, an eco-friendly bar, Seed, and the national fondue chain The Melting Pot.

"People see the value of being downtown," says Rex Benton, a commercial real estate advisor with Mopper Stapen. "With almost seven million visitors per year in the tourist market, they see the draw of that."

But these new businesses face an uphill battle vying for survival in tough times."While spring was strong with tourists, we are not seeing as many locals out spending like they used to," says Burge. "I also think that people are much more careful with their purchases."

Broughton Street remains one of the most dependable areas in the city for foot traffic and visibility, the old adage "location, location, location," isn't as certain a recipe for success as it once was.

Allison Nanninga moved her clothing boutique Mint down to Broughton Street from its previous location on Liberty Street in search of higher visibility, but only stayed for a year before relocating to the Design District in need of better lease terms.

"We're in Savannah, not Charleston or Raleigh," says Nanninga. "Savannah is what it is, but people are trying to make it more than it is. It's not a huge money-making machine...It's a cute little city."

According to Nanninga, part of the high turnover of businesses along Broughton has to do with unrealistic lease rates, and the widespread "triple net" lease, which shoulders business owners with additional costs such as property taxes, insurance and maintenance for the buildings they occupy, but don't own.

"Triple net has put people out of business," she says. "You're supporting the building owner, not yourself. It makes no sense."

While the triple net leases may add additional expense to what business owners pay in rent, David Sink says that it has been "common for quite sometime," and that the expenses are simply hidden by other types of leases.

"Those expenses are still being paid for in other kinds of leases," says Sink. "They're just not being separated as individual line items...It's not a profit center for the landlord."

The question remains whether some commercial property owners could be potentially hindering some growth downtown by keeping lease rates at the same level they were during much stronger economic times.

According to an office market survey completed this year by local firm Melaver Mouchet, the average lease rate is currently $18.86 per square foot in the Central Business District (an amalgamation of downtown, the Victorian District and several adjacent neighborhoods). According to the same survey done mid-year 2006, a relative boom time for downtown growth, the average cost per square foot was $18.85. And while lease rates may not have gone up in the CBD, the vacancy rate has, from 10.76 percent in 2006, to over 24 percent in 2009.

That lease rates haven't changed is somewhat curious, considering the rise in vacancy, as well as some other market indicators. The Society of Industrial and Office Realtors (SIOR) is a national professional association that releases a quarterly index number, which analyzes a variety of factors to determine the health of the real estate sector nationally and regionally.

When the index is above 100, it is a seller's market, and below 100 is a buyers market. Currently, the index number has fallen for 10 consecutive quarters, and the South, which has the highest index number of any region, only scores a 46.3, down from a previous high 130.45 in the fourth quarter of 2006.

While lease rates may not have followed the precipitous fall of the index, many business owners are finding that property owners and managers are willing to cut deals to ensure that spaces stay filled.

"Landlords are getting more aggressive so far as what they're willing to do with free rent and stuff like that," says Rex Benton. "There are tenants out there trying to work with their landlords, and there are landlords trying to keep tenants in place while they're going through this slower time."

Not every business is so fortunate, though. Mom & Nikki's, a soul food restaurant in the first floor of the Con-Ed building on MLK, was forced to close its doors just a few weeks shy of the restaurant's three-year anniversary at that location.

"Things were hard, and we were pulling and stretching, but doing what we needed to be doing to maintain," tells proprietor Nikki Bush. "Once this year came in, even more of our people started losing their jobs, so the first thing they're going to cut out is eating...We tried to re-negotiate, but they said they didn't know whether they could go down on rent right now."

With all the restaurant equipment in storage, Bush has begun the process of looking for a new space and has gotten help from the SDRA, as well as some of her customers. "People have been calling my cell phone telling me, ‘there's a building at such and such location,' I've even had people who own buildings calling me," she says.

While the support of the community has been there, the hard part has been finding a location that is both suitable and affordable. "Our business was probably about 52 percent locals and 48 percent tourists, and my focus is to stay centralized near that area," she says.

The challenge that she's having is finding the financing necessary to start over again in a new location, although she's eager to get back to serving up food.

"We have customers that are literally almost family for us," she explains, "That's why we don't want Mom & Nikki's to end...when you develop relationships like that with people it makes you appreciate what you're doing."

The bursting of the housing market bubble might have been what tipped the economy into recession, but the commercial real estate market has suffered equally hard times because of the resulting difficulty of securing financing.

"People are certainly getting more creative when making deals," says David Sink. "They've got to be more aggressive, but they're still constrained by the financing market. It really takes a whole other level of creativity to get deals done."

"Commercial loans are extremely hard to get," states Rhett Mouchet.

The lack of available capital is keeping a lot of businesses from being able to open because they can't afford to sign a lease, or to complete build out necessary to re-finish existing spaces to their specifications.

"You get to negotiating a lease...then you try to get the tenant in place," says Rex Benton, "But if you can't get the tenant in because they can't build out the space, then you're kind of stuck."

Although the business forecast may seem gloomy at the moment, there is a silver lining, and the question on most people's minds isn't whether the city's economy will recover, but when.

"Between Wilmington, N.C., and Jacksonville, Fla., it still appears that the growth of this market is going to continue," says Mouchet. "We're really optimistic."

"There've been plenty of positive signs lately," Sink agrees. "But I don't think anyone's going to flip a switch and everything's going to be rosy again."