How small businesses make the most of leased retail space

In some ways, business owners are entering this year with more certainty about the future than they had this time in 2024. Compared to this time last year, businesses have more clarity around interest rates, inflation, and who will be in the White House this year.

But there’s still more than enough uncertainty to go around — like, for example, what’s going to happen when the leases on the spaces they operate in come up for renewal.

Some businesses can manage that uncertainty by owning the spaces they operate in. But for a lot of small businesses, buying a building simply isn’t an option. As a result, many business owners have been trying to figure out how to make the most of their leases.

Over the last couple years, Jess Harrington has been thinking about buying a warehouse for her company in the Boston area called Finessed Home Staging, which stages homes that are up for sale. She currently rents out a warehouse to store all of the furniture she uses, and space is getting a little tight.

“I stock enough furniture to furnish around 45 homes,” Harrington said. “I don’t have enough storage space already, as it is.”

But Harrington said right now, buying a warehouse is a non-starter. For one, there just aren’t many places available that are big enough to suit her needs. But the big reason is that she still owes rent for the two-and-a-half years left on her lease.

“I don’t want to have both a mortgage and lease for longer than I have to,” Harrington said. “That would put a lot of strain on my business.”

So in the meantime, Harrington said she decided to make do with the space she’s renting.

To make it work, she’s subletting some additional space from another business owner upstairs, who has some unused square footage. Harrington said that gives her some runway to keep growing the business before her lease ends.

“They’re billing me in 500 square foot increments as I’m using it, so I’m not paying for what I don’t need, which is great,” Harrington said. “I can control my costs more.”

Business owners who rent their spaces also have to decide how much they want to invest in them. Marcia St. Hilaire-Finn, president of Bright Start Early Care & Preschool in Washington, D.C., operates four locations, three of them in rented spaces. Right after she signed those leases, she made some serious upgrades.

“We had to put sinks in [one location], there were no sinks in the classroom, we had to put cabinets, we had to change the flooring,” St. Hilaire-Finn said. “We had to put washer-dryer, dishwasher, so, pretty much, we had to do a total renovation on it.”

Part of that was simply to make the space daycare compliant. But St. Hilaire-Finn said she also has high standards for her brand. So even though she doesn’t actually own the building, she treats the building like it’s hers.

“At the end of the day, we represent whatever space we’re in,” St. Hilaire-Finn said. “So we want to make sure the space represents us.”

St. Hilaire-Finn said pouring hundreds of thousands of dollars into upgrading a rented space also gives her some leverage with her landlord. She said when she signed her leases, she asked her landlords to give her concessions, including several months of free rent.

“Most of the landlords have, because they know for them, it adds value,” St. Hilaire-Finn said. “So they put in some, and you put in some, so both parties are happy.”

That said, many landlords are under a lot of pressure right now to raise rents, said Tom Taylor, head of research at Trepp, a commercial real estate analytics company.

“Real estate taxes are up,” Taylor said. “Property insurance, way up — like, way, way up, especially in certain coastal communities. Utilities are up. Labor costs are up.”

Trepp found that in many parts of the country, including the West Coast, New England, and the coastal South, rents on retail spaces have been rising.

Ken Giddon, co-owner of Rothmans, a men’s clothing store chain in the New York City area, said where he is, higher rents are a given.

“If you’re in a retail spot that you like, you’re obviously there because you think things are going to get better there, and you think that you can build a business there,” Giddon said. “If that’s the case, it is highly, highly unlikely that the price of that space is going to go down. It’s going to go up over time.”

Giddon said there are ways to plan around rent hikes. Earlier this year, he signed a 10-year lease on his Manhattan location. He said long-term leases like that often come with scheduled rent hikes every three years or so, which is something he can anticipate.

“If you know that your rent is going to be 5% higher in three years, you can plan for that,” Giddon said. “It’s all about having the numbers in front of you, and figuring out whether you can still make money at these higher prices.”

Giddon said he’s confident that he will, since over the last few years, his clothing sales have been pretty good.