Smaller Stores Are Making More Money. Here’s Why.

Here’s what changed. Delivery and mobile ordering ate into the need for dine-in seating. A tenant doesn’t need forty seats if half their revenue comes through a third-party app or a pickup shelf by the door. So why pay rent on square footage nobody sits in?

This is showing up everywhere in the DMV. Walk down 14th Street in DC or through Mosaic District in Merrifield and you’ll see smaller footprint concepts taking spaces that used to sit empty because they were too big for one tenant and too small to split. A 1,200 square foot box that would’ve been a dead listing three years ago is now exactly what a franchise developer wants.

Landlords haven’t fully caught up. A lot of them are still underwriting deals assuming a tenant needs the same square footage their predecessor had. That’s a mistake. If your space sat vacant for eighteen months, ask yourself if the problem was price or if the problem was size.

Here’s the part that should make every landlord in Prince George’s County or Fairfax pay attention. Jersey Mike’s isn’t shrinking because business is bad. They’re shrinking because business is good enough that they don’t need the extra space to make the same money. That’s the opposite of the old logic, and it’s going to keep confusing landlords who think square footage and revenue move in the same direction.

A landlord holding out for a 1,500 square foot tenant in a market that wants 1,200 isn’t being patient. He’s just watching a rent check drive past him.

If you’re a tenant sizing your next location, don’t default to what you had before. Model your revenue per square foot first, then find the box that fits it. If you’re a landlord with an oversized vacancy, look at whether you can demise it down before you drop the rent again.

What’s your space actually earning per square foot right now, and would you take less space if it meant a shorter build-out and a faster opening?

One more thing before I let you go. It’s the Fourth of July. Somewhere in the DMV today there’s a landlord grilling burgers and telling himself 2019 rents are coming back any minute. Happy Independence Day. Optimism is still legal, even in commercial real estate.

Until next week — Ed