Industry Experts Discuss Current Trends and Issues – Along with Key Factors Shaping Today’s Markets
Some laundromat owners are multi-store operators who have learned the real estate business due to a series of retail leases and/or building purchases over the years. And many others are simply budding small-business owners looking for a successful location or two, far removed from the 9-to-5 corporate grind.
Whatever your background, as a laundromat owner, you are – by definition – a player in your market’s commercial real estate arena. As such, the upswings, downturns and nuances of the commercial real estate industry can affect your business as strongly as your equipment mix, your staff and your water bill.
And 2021 has already been an interesting year in that regard.
“As monumental as 2020 has been, 2021 could be even more influential, as the critical decisions and investments leaders make now could bear fruit over the next 12 months,” said Kathy Feucht, global real estate leader at Deloitte, a London-based professional services network.
Retail storefronts, as well as hotels and office space, are expected to trail a broader economic recovery from the COVID-19 pandemic. In fact, more commercial properties likely will go belly-up during the first half of 2021, before commercial real estate begins to stabilize in the second half of the year, experts predict. Meanwhile, warehouses and distribution centers are expected to become even more valuable.
To weather the tail end of the pandemic, commercial real estate investors were expected to reduce costs by 25 percent on average in 2021, according to Deloitte.
More retailers went bankrupt in 2020 than during the Great Recession, especially department stores and apparel retailers. As brick-and-mortar retailers burn through cash reserves and consumers shop online, even more retail properties will go empty, and landlords will default on their loans in the first half of 2021.
Experts predict there will be 20 percent less retail real estate by 2025, according to the CBRE Group, a Los Angeles-based commercial real estate services and investment firm.
But once the coronavirus vaccine is distributed in the U.S., shoppers are expected to leave their couches and return to experience brick-and-mortar stores.
“As we look to 2021 and beyond the pandemic, we believe people will desperately want to connect and gather, and experiential retail will once again thrive,” said Terry Montesi, CEO of Texas-based Trademark Property Company.
Currently, malls and urban retail in places like New York City and San Francisco have the worst outlook. Vacant storefronts likely will be replaced by healthcare and wellness centers, grocery stores and other alternative shops, while some retailers have pivoted to help meet demand for e-commerce.
“We are seeing a demand for ‘dark stores,’ where retail sales aren’t fueled by pedestrian traffic, but by curbside pickup and same-day delivery,” said Claudio Mekler, CEO of Miami Manager, a private investment firm based in south Florida that owns community shopping centers in Miami-Dade, Broward and Palm Beach Counties.
The shift from brick-and-mortar retail stores to e-commerce has only accelerated during the pandemic, increasing the need for industrial and last-mile logistics facilities. In the third quarter of 2020, e-commerce comprised 14.3 percent of total retail sales, compared to 11.8 percent in the first quarter, according to J.P. Morgan. The crisis forced consumers to change their shopping habits. And, with more online retail options for electronics, medication, etc., this increase will likely be permanent.
Generally, grocery-store-anchored shopping centers have remained stable, people still need to buy food during a pandemic. However, traditional malls have suffered. Some major retailers and mall operators have filed for bankruptcy, and their woes are likely to continue as e-commerce expands. Some cities may benefit from rezoning these properties into other allowed uses, such as residential.
Laundromat Real Estate Trends
So, what does that “big picture scenario” really mean for you, the laundry owner?
“C-class commercial real estate, which is typically in lower-income areas and older shopping centers, are hurting,” explained George Morgan of Best Laundry Brokers, Grass Valley, Calif. “In my markets, those landlords have got a lot of tenants that they’re trying to keep going, rather than kicking them out – and a lot of these existing tenants, not just laundromats, are way in arrears on rent.
“From a laundromat point of view, it should be a good market for people to build new stores in these types of centers, or to negotiate a new lease with the landlord. In general, these landlords are eager to make deals.”
Space is becoming more abundant, and landlords might be in a position to sell property if they cannot get their space leased out, according to Madison Dang, a broker at Elite Business Investments in Valley Village, Calif.
“This is key for laundromat owners, because it may allow them to enter into deals with the real estate included,” Dang said. “But keep in mind that this is risky, as finding tenants at this time is still a struggle under the current circumstances.”
Karl Hinrichs of HK Laundry Equipment, based in Armonk, N.Y., believes that, in the post-COVID-19 era, landlords are going to be looking to diversify their tenant mix portfolios.
“Landlords will want to have steady tenants who will pay their rent month in and month out, regardless of the economic situation,” he predicted.
“Laundromats are valuable tenants to landlords,” said Brad Steinberg, co-president of PWS Inc., based in South Gate, Calif. “This could be both good or bad for those laundromat tenants. Landlords might be more willing to keep their laundromat tenants in place, or they might look at laundromats as an area where they can squeeze additional rent.”
To date, Steinberg hasn’t seen a huge change in rents or sale prices of retail property, due to the pandemic.
“I would envision at some point there will be a correction,” he predicted. “There’s going to be a move toward creating experiences inside traditional retail stores. Also, a lot of malls and large shopping centers are starting to be repositioned as industrial spaces.”
What’s Driving the Market?
Dang noted that interest rates are comparatively low at the moment, and the value of the dollar is cheap. Lenders are competitive and taking bigger chances on deals.
“Another factor is going to be the increased availability for sub-leasing,” Dang said. “This is important. As businesses reduce their space needed, they will be able to offer up partial space and reduce the rent expense for themselves and the sub-lessee. Landlords like this option, as it gives them better security, knowing the space can be leased.”
In addition, landlords are now more aware of the benefits of leasing space to business that may fall into the “essential” classification, according to Russ Arbuckle of Wholesale Commercial Laundry Equipment SE, headquartered in Southside, Ala.
“Many non-essential businesses were forced to close, which wreaked havoc with landlords, who are now experiencing shortfalls in rent and struggling to pay their mortgages,” Arbuckle said.
Hinrichs pointed to the economic basics of supply and demand.
“Vacancies are up and initial rents are down, and I believe that this is all driven by the high number of commercial vacancies in the marketplace,” he said. “Landlords have been beaten up during the last couple of decades – there was the banking recession that lasted nearly 10 years and now the COVID-19 recession where a lot of small, mom-and-pop businesses threw in the towel and closed their doors. The good news is that any business that has survived so far should do very well as business starts to boom in the near future. And landlords that have weathered the storm will see better days ahead.”
By contrast, at least in California, Morgan suggested high construction costs, as well as the pandemic, as key reasons for a scarcity of strong new locations in his markets.
“There has been no new construction,” he explained. “For quality new commercial retail spaces, landlords are going to need to get about $4 per square foot per month in base rent to make it work – and many laundromats can’t compete in that type of situation.”
Of course, COVID-19 has been a major factor impacting the commercial real estate market.
“I’ve had several customers tell me they have been approached by hospitality business owners who are looking to move into an industry that gives them some level of protection against the possibility of future shutdowns,” Arbuckle shared. “These hospitality operators were making substantial offers to purchase those laundromats. This increased interest should only make laundromats more valuable going forward.
“The commercial real estate markets certainly took a hit from the COVID restrictions. Tenants not deemed ‘essential’ closed their doors, and there were a great many defaults. The states that were the most restrictive had a larger proportion of businesses close.”
Perhaps the silver lining for the laundromat industry is that this has created more open retail spaces for store owners to lease.
“Many of the major cities across the U.S. faced lockdowns and restrictions that forced closures to small businesses and corporations,” Dang pointed out. “This deeply affects the market, because it means landlords are not collecting rent on their properties and they’re not able to pay their mortgages – which leads them to foreclosure or having to sell.
“Unfortunately, the pandemic will have real estate ramifications for years to come. It will be interesting to see a new wave of investors coming into the market.”
What the Future Holds
Looking ahead, Dang said he anticipates the market will experience a decline in the leasing/buying of office space, as many businesses transition to “hybrid working” from home and office. He also predicted an uptick of warehouse and distribution centers, as more businesses begin to sell more direct-to-consumers online, rather than in person.
“This could put a damper on the market, as there will be an influx of space and properties, and not enough tenants and buyers,” he said.
Hinrichs sees opportunities for commercial real estate in the near future.
“I believe that an economic boom is just on the horizon,” he predicted. “Once people receive their full series of COVID-19 vaccinations, we will see a movement of ‘back-to-normal’ behaviors, such as dining out and traveling. The vaccine has an uplifting effect that I believe will be felt by most Americans, and we all will return to our normal shopping behaviors.
“Once businesspeople see the American public returning to normal spending behaviors, businesses will emerge to fill those opportunities. At this point, we will see less and less vacancies in the commercial real estate market, and rents will start to edge higher and higher.”
Connor Frankian of D&M Equipment Co. in Chicago believes that now is perhaps one of the best times for laundromat investors to find great deals on retail space, due to the amount of it that’s currently available.
He added that the commercial real estate market will be largely influenced by the area of the country in which it’s located, as well as how the state and local governments are handling the current pandemic.
“With that in mind, I believe it’s also important to take note that the migrations of populations from large cities to second cities will surely continue throughout the rest 2021,” Frankian said. “This also will impact the real estate market in these specific areas of the country.”
As for commercial rents, variances are being reported depending on the particular class of property, as well as the specific market.
According to Scott Carruth, senior vice president at CBRE, many landlords are lowering rents and working with tenants, at least temporarily, to retain them and keep the doors open.
“Long term, they’re going to want to get back to where they were in terms of the rents,” Carruth said. “But, to keep the lights on, they’re lowering rents.
“We anticipate retail rents going up in the future, and those rents will rise faster than inflation. The main reason for this is that, when businesses open up, there’s going to be a surge – and there’s a lack of available real estate.”
Just because there is a pandemic doesn’t mean mortgages are getting any cheaper, Dang stated.
“For the deals I’m working on, the rent is still being charged at market price, and landlords – unless they own the building free and clear – are becoming tougher to negotiate with,” he said. “Warehouse/distribution space is being leased at or above market rent, while office space is a bit more flexible, if the landlord doesn’t already have plans to restructure the space away from offices.
“In Los Angeles, rents are already climbing. Nationwide, I would anticipate an increase as well. Landlords are going to need to recoup their losses from the pandemic and, with little government support to the property owners and tenants to keep the doors open, it would only be a matter of time before the rental rate sees an increase.”
In parts of the Northeast, rents appear to be down considerably in markets with an abundance of commercial vacancies, according to Hinrichs.
“As more and more Americans get vaccinated, I would expect an uptick in consumer confidence, a resurgence of in-restaurant dining and the opening up of more mom-and-pop type businesses,” he said. “As commercial real estate sees a reduction in store vacancies, I would expect the rents to increase.”
In Arbuckle’s Southeast markets, he sees rent demands falling. In many cases, landlords are willing to reduce the rents in order to keep their spaces leased, he explained.
“With the increase in supply of commercial spaces, the inevitable result is lower rents,” Arbuckle stated. “Of course, from a supply/demand perspective, as the empty spaces are filled and the supply diminishes, landlords will again see the opportunity to increase their rents.
“Additionally, the pandemic has reduced planned shopping center projects, which keeps the available spaces limited. This most likely will be a short-term effect. As COVID-19 retreats further and further in our rearview mirrors, developers will start to move forward with new project development.”
“Rents have come down over the last year,” observed Alex Harris of Professional Laundry Systems in Deer Park, N.Y. “Of course, office space is at an all-time low, but retail space also has been reduced considerably, due to the vast closure of non-essential stores.
“My feelings are that, if landlords are sensible, rents will remain stable for the next few years. After all, there are many vacancies, and people are adjusting to the new norm of getting back out in the community.”
The fact of the matter is that many commercial landlords realize it’s in their best interest to try to work with their existing tenants than to evict them, according to Morgan.
“Rather than have to hire a broker to find a new tenant – as well as pay tenant improvement money and offer free rent – it’s much easier for the landlord to work with what he’s got, especially in the current environment.”
Working with Commercial Landlords
Dang has noticed landlords being “extra particular” these days with regard to the business models and business plans of the potential tenants.
“I’ve had deals where the landlord requested a multi-year business plan,” he shared. “My thoughts are that landlords would like better insight into how the tenant’s business is run and if the business can be sustainable amidst another outbreak. Landlords are still looking for common paperwork of financials and tenant applications, but the business model and plan seem to be paid attention to much more carefully now, as the landlords would like to be a bit more involved with the tenants and more clearly understand their businesses.”
Dang added that he’s found corporate landlords much more fixated on their rents and less willing to renegotiate. On the other hand, he’s seen private owners be a bit more lenient when it comes to renegotiating leases for current tenants and willing to work out a more realistic lease structure for prospective tenants.
“What I’m seeing in the marketplace is that landlords are willing to make deals to get any new businesses into their shopping centers,” Hinrichs said. “They’re willing to pay for improvements and willing to work on deals to get long-term, stable tenants. I’m also finding that landlords have no interest in reducing the rents of existing tenants. If your lease is expiring soon, they’ll certainly talk and be very aggressive, but few seem interested in talking about rent reductions to tenants who are locked into long leases.”
Hinrichs added that commercial landlords, not surprisingly, are looking for stability and long-term tenants.
“This plays perfectly into the hands of the laundromat industry,” he said. “I’d suggest store owners revisit locations that previously weren’t interested in laundromats or where the rents were too high. The landlords may make a lot more concessions for a stable laundromat tenant than they would have considered just two years ago. After all, we’ve always realized that laundromats help an entire shopping center – and landlords are beginning to realize this fact, too.”
“Since laundromats were deemed ‘essential’ businesses, thanks to the efforts of the Coin Laundry Association, landlords are more aware of the benefits of having laundromats as tenants,” Arbuckle said. “I’m sure most landlords will be more open to negotiating rents going forward.”
He added that creditworthiness and financial strength have never been more important to commercial landlords, with regard leasing to new tenants.
“I believe most landlords will be more conservative when looking at potential tenants,” Frankian concurred. “With these uncertain times, they will be looking for more financially solid tenants to protect their own interests, rather than take a risk.”
Given that, right now is probably one of the best times to negotiate a lease, according to Harris.
“Pre-pandemic leases were at an all-time high,” he said. “But landlords now appreciate stable tenants, such as laundromats. Let the landlord know that you want to remain in business at his facility and re-up your lease for a longer term – or, better yet, see if the landlord has an interest in selling the property to you. The negative sigma that had followed laundromats around is rapidly fading away.”
In general, commercial landlords are finally erasing the negative image of laundromats as tenants that many of them shared for so long.
“I’d say that landlords have a better outlook on laundromats these days,” Dang noted. “Although there were some laundromats that were forced to close due to COVID-19, the majority of the industry made it through and even flourished. Laundromats are sustainable and essential to society, and landlords recognized this during the pandemic. Landlords now know that a laundromat can be a true anchor tenant to a center and can really drive business to the other tenants in that center.”
Hinrichs referred to laundromats at “bedrock tenants” within shopping centers.
“Laundromats attract and hold cash-carrying customers within shopping centers, and they actually help the other tenants survive,” he explained. “Laundromat customers are stuck in the center as their clothes are washing and drying. So, to pass the time, those laundry customers will shop at neighboring stores.
“You can argue that McDonald’s and Dunkin’ Donuts bring in more foot traffic than laundromats, but there is no carryover traffic to the other tenants. Fast-food customers simply swoop in, grab their food and fly out of there.”
Most landlords now recognize the value of laundromats in their centers, Arbuckle observed.
“There has been a shift in the overall perception of laundromats,” he said. “I believe the CLA and the LaundryCares Foundation have been able to increase public awareness as to what a modern laundromat truly looks like today. In addition, landlords see laundromat owners investing hundreds of thousands of dollars into their facilities.”
“Laundromats are certainly becoming more and more positive in the minds of landlords,” Steinberg agreed. “They’re survived recessions, the growth of e-commerce – and now a pandemic.”
