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Leasing Out Commercial Property Brings Its Challenges. Here's What To Look Out For

 |  13 June 2019

Leasing out commercial spaces brings its own set of unique challenges. To get the most yield out of a commercial property portfolio, landlords need to make sure they have a strategy in place to maximise returns.

Neglecting a commercial leasing strategy affects the growth of your portfolio – it’s ultimately a costly investment mistake.

Identifying trends, market shifts and other commercial real estate (CRE) variables affecting the industry requires planning as much as it does talent.

For commercial landlords, crunching the numbers on projected rental revenue will help to highlight financial goals to chase, while also identifying what constitutes a good or a bad investment when looking to scale a portfolio.

Having all the information at hand makes landlords a thousand times better at decision making.

Knowing the nuances of commercial leases – such as the difference between commercial leases and retail leases – will help to make landlords more commercial property savvy, and will help them make informed investment moves to grow their wealth.

Read our Ultimate Guide to Lease Administration HERE

Try to find consistency with your lease terms

Put in the research and number-crunching leg work to identify how your lease structures should look.

This is valuable for commercial landlords managing their own property because it gets you thinking like a property management agency. In some sense, to be an effective self-managing commercial landlord, you need to play the role of the agency.

Typically, and as you may already know, commercial leases start at as short as 3 years and as long as 10+ years.

Regarding lease terms, figure out your ideal lease term per asset class in your portfolio (office, retail and/or industrial).

Each asset class is different, and requires a different approach to lease terms. Find consistency in each of your asset classes so your portfolio can generate a steady, healthy yield.

Consider revisiting the lease-the-best-space-out-first methodology

It’s simple to get caught up in putting all of your eggs in one basket by leasing out your best spaces in a given building first.

The prime space that has the best lighting, is the largest per square meter, and boasts the grandest existing fit out should be the easiest to lease.

By taking your best spaces off the market first, it may be difficult to lease out your quote-un-quote less attractive spaces.

While this tip doesn’t apply to all commercial property leasing situations, it’s certainly important to take it into consideration when you’re filling out your vacant buildings.

Perform tenant health checks and know their business objectives

This is really important. Understanding who your potential tenants are, what their business is, as well as what industry they’re in will determine whether they’re the right fit.

Leasing out commercial spaces shouldn't be rushed – with such long leases you want to make sure that your tenants are aligned to your business goals just as much as they pay their bills on time. They’re two equally important variables.

If you find yourself with a bad tenant stuck in a long lease, you run a gargantuan risk of losing big money and opportunities to grow your wealth.

You can’t forget about tenancy competition…

Let’s look specifically at retail spaces here.

If you’re a landlord who owns a lot of retail space in the same region (say a number of shops in a mall or multiple shops on a busy strip), you want to try to avoid putting competing business close by.

This will create external issues the bottom line of your portfolio can do without, so it’s best to avoid situations like these by getting a healthy diversity of businesses and blue-chip tenants to round out your tenant pool.

Try not to affect future leasing opportunities by inappropriately investing in building upgrades

Upgrading and improving your buildings is a must in today’s technologically advanced world. But that doesn’t mean you have to fix buildings that aren’t broken.

The way your buildings are in their present state may be exactly what your future, prospective tenants are after, so do thorough research before investing in building upgrades.

Know what financial data needs to be in shape to reflect a healthy investment

As you know, commercial real estate offers rental yields from anywhere between 5% and 12%, which is much higher than the sub 5% that residential property offers.

While the exact number may differ across various global markets, rental yields for commercial property that exceed 10% are generally considered healthy investments. If your properties are reflecting this level of financial health, you're in good stead.

So immediately by investing in and filling out your buildings with tenants you’re putting yourself in a cash-flow positive position.

In addition, calculating what each property’s weekly, monthly and annual net returns are will determine the financial health of your investments, as well as the room available for further growth.

Don't forget about your weighted average lease expiry (WALE), too.

Understanding your competition is crucial

Having knowledge on how surrounding buildings are performing is a good way for commercial landlords to be up to speed with their competition.

Digging deeper to understand their competitor’s tenants, what they do for business and how this may ultimately affect their portfolio is golden knowledge for landlords.

Do you continue to invest in the region? Or do you diversify? The findings out of an exercise like this are key growth drivers.

Get creative with the marketing of your vacant properties

Look to invest in platforms and areas that your competitors aren’t in order to stand out. Get creative in the ways you market your properties.

Commercial landlords who are managing their own properties are essentially in competition with agencies, so cutting through the noise to attract interest from the right tenants can only be achieved if you’re doing things differently.

Talk to digital marketing consultants and do your research to determine what the most innovative ways to lease out your properties are that fit within your budget.

Demonstrate that your buildings are different by innovating

In contrast to the point we raised earlier on not investing in unnecessary upgrades, when the time is right you should be making your buildings smarter.

Commercial landlords are limited in how they can differentiate their buildings from the market, and by investing in smart building technology this can be achieved.

Behind the scenes, commercial landlords should innovate by implementing a modern property management solution that provides technology that makes both the management of the property easier, as well as the tenant’s life easier.

Access to key tenancy documentation should be easily accessible. By innovating their commercial real estate business, CRE landlords put themselves in the best position to spike revenue.

Set your business up for success by managing your leases effectively. Read our Ultimate Guide to Lease Administration here


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