Small businesses victims of declining tourist dollars, rental cost squeeze
August 9, 2004
When Levon Touryan opened Lake Tahoe Pizza in 1977 in the Kings Trading Post, he paid 29 cents a square foot in monthly rent.
But a lot has changed in South Lake Tahoe and many argue the empty storefronts seen around town reflect a trend. Most businesses along Highway 50 pay an average of $2 a square foot in commercial rent from one end of town to the other, with premium spots like those found in the redevelopment at Heavenly Village going for $4.
Facing triple the commercial rent at the Highway 50 shopping center in 1980, Touryan bought a 2,600-square-foot building on Emerald Bay Road for $203,000. He describes the structure as “almost too big in winter and too small in summer.”
Commercial rent, with rates traditionally following the consumer price index, has driven up the cost of doing business on the South Shore and elsewhere in California. In the last six years for example, the index has risen 15.8 percent for the Bay Area district of which South Lake Tahoe is a part.
However, business owners are actually paying an average of 25 percent more in commercial rents than they did in 1999. In the last decade, the rates spiked in one year by 7 percent, according to Peggy Eichorn, an agent with Coldwell Banker who specializes in commercial rentals.
“I came to the quick realization that owning my own building instead of leasing makes a phenomenal difference,” Touryan said. “Otherwise, I wouldn’t advise anybody to do business in South Lake Tahoe.”
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And operating a two-season business during the slow times can be tough.
“The shoulder season can kill you,” he said. “In the summer, you can’t have enough employees, and you can’t work hard enough. In all fairness, the customers don’t get the service they deserve.”
The many costs
Stack into the equation other costs, and small businesses like Lake Tahoe Pizza are squeezed.
For example, Touryan pays $500 a month for customer parking.
Competition also poses another challenge – especially from chain stores, Touryan said.
“Small businesses are being eliminated in the city. We’re now going with chains – franchise city. Six Starbucks in town is a perfect example – one, a block away from Alpen Sierra. That’s indignant,” he said.
Jill Beede has discovered that sales receipts need to go up to offset her business expenses at Tahoe Country – a novelty arts and gifts shop shelling out about $14,574 in expenses each month.
Almost a year ago, the small business owner moved from a tiny space on Highway 50 across from Bank of America to the redevelopment area.
“One thing I have found out is the clientele isn’t as upper income as I thought,” said Beede, who grew up in the retail business in Concord.
She’s eagerly awaiting the cinema to open. Right now, it’s a heavy construction zone along Park Avenue.
“It’s tough here. Tahoe has been promoted as a sports venue rather than a cultural one. You have to be confident in going out there. The sales amounts they’re spending are not as high as they should be. People may be still traveling, but they’re not spending,” she said.
Bill Connelly, who owns Silk and Sable Clothing in the Factory Stores at the “Y,” has come to rely on the locals for his business survival.
“It’s hard to do business here. The tourism economy has dropped off so badly. It’s the worst I’ve seen in 20 years. Business is up, but it’s because of the locals,” he said.
Connelly pays $3 per square foot every month in rent.
In the last year, South Lake Tahoe commercial rents have gone up about 2 percent on average, according to Eichorn.
“Commercial rents are more predictable than residential,” Eichorn said on a tour of commercial complexes last week.
“We’ve had more vacancies than we’ve run in the past. I think retail in the Carson Valley is hurting business,” she said. “But everything will rent. It’s just a matter of the market.”
South Lake Tahoe appraiser Dave Seifert has noticed the larger inventory of spaces, but “not abnormally high,” he said, while riding around with Eichorn.
Then, there are other factors in success and failure – like the amount of space and location.
The Blue Lake professional plaza rents space for $1.56 per square foot each month, and “always stays full,” Seifert said. He also says the Town & Country Center has strong occupancy rates. The midtown location rents its space for $1.80 per square foot in front and $1.25 for the back units.
For example, Office Depot – which closed despite a 17-year commitment on its lease on Emerald Bay Road – would rent its building for $2.07 per square foot each month. It’s now vacant, with no prospects of a company taking over the space.
“It’s too big for smaller businesses, but too small for chains,” Eichorn said of the difficulty wooing a business in the space. Seifert agreed.
Another chain store is coming into the Bijou Center for $1.25 per square foot. Long’s Drugs will add about $800,000 in improvements and open the 15,000-square-foot structure where Smart & Final was located.
As for small businesses in that center, Nancy Smyth expressed optimism for her Dog Wash business. Since she took over last March, sales receipts have climbed, and she’s seeing about 10 new customers a day.
She rents her 800-square-foot space for $1.41 per square foot a month.
“I know running a small business is hard. But you have to give it at least two to three years,” she said.
The odds of staying in business are low
The California Chamber of Commerce reports 80 percent of small businesses close their doors within five years.
Duane Wallace, South Lake Tahoe Chamber of Commerce executive director, has tied many of the businesses that have gone under to rising expenses and a “jungle of regulations.”
Instead of using the CPI as a gauge of rents, he suggested businesses request commercial rental agreements based on sales receipts.
“Some of the landlords are from out of town and try to get San Francisco rents,” he said.
But the squeeze of costs for South Lake Tahoe businesses could be a sign of the times – especially for tourism-based economies like Vail. The Colorado town has commercial rents that dwarf South Tahoe by at least three times.
“I don’t know anything that rents for $24 (per square foot, per year) or less,” Vail Chamber of Commerce Executive Director Kaye Ferry said Monday. “It’s a strange market. We are actually hoping, with redevelopment going on, that it will drive some of those rents down. But I’m not sure that remains to be seen.”
Of course, the town has the sales to substantiate the higher rents. The average summer month pulls in $1 million in sales tax, with South Lake Tahoe’s raking in about a third of that in a given month. Vail’s sales tax doubles in December, and triples in March for the ski town – 72 percent of its residents are second-home owners.
– Susan Wood can be reached at (530) 542-8009 or via e-mail at email@example.com