What Is WALE? Why Is It Important For Commercial Property Investors?

Understanding WALE

The Weighted Average Lease Expiry (WALE) is the way to measure the average time period that all leases in a property will expire. It is a crucial metric used in the commercial real estate industry, particularly in property management and investment analysis.

Why WALE matters

WALE is important for several reasons:

• Lease Term Analysis: WALE shows the average remaining lease term for all tenants in a commercial property portfolio. The calculation gives more weight to longer-term leases. With this information, property managers and investors can see how long tenants will keep occupying the space. Understanding lease commitments helps you plan for renewals and manage risk.
• Risk Assessment: A longer WALE typically indicates lower leasing risk. If a property has a high WALE, it means that the majority of its tenants are locked into leases for an extended period. This reduces the risk of vacancies and potential income disruptions. In contrast, a shorter WALE signals higher leasing risk. It may also mean more frequent lease turnovers and active leasing efforts.
• Investment Decision-Making: Investors and property managers use WALE to assess the attractiveness of a commercial property as an investment. A longer WALE can be seen as a positive attribute because it provides income stability and reduces the need for frequent lease renegotiations. It can make a property more appealing to long-term investors.
• Valuation and Financing: WALE can also impact the valuation of a commercial property. Properties with longer WALEs may be valued more highly because they are perceived as less risky. In addition, lenders may offer more favourable financing terms for properties with longer WALEs, as they are considered safer investments.
• Strategic Planning: Property managers use WALE to plan for lease expirations and renewals. It helps them develop leasing strategies, such as staggered lease expirations, to minimise potential vacancies and income disruptions. It also aids in budgeting and forecasting rental income.

How to calculate WALE

For commercial property investors, it is a vital calculation that provides insight into potential income or losses. To calculate WALE, you typically sum the remaining lease terms of all leases within a property or portfolio, weighted by the rental income each lease generates. The formula is as follows:

WAL formula

 Table 1: Example WALE Calculation

To calculate the WALE for this property portfolio:

WALE = (Sum of Weighted Lease Term) / (Total Annual Rental Income) WALE = 860,000 / (50,000 + 40,000 + 60,000 + 35,000) = 860,000 / 185,000 = 4.65 years

In this example, the WALE is 4.65 years. That means, on average, leases in the portfolio will expire in just over four and a half years. WALE reflects the average remaining lease term, weighted by rental income and lease duration. A higher WALE suggests lower leasing risk and more stable income.

Banks use WALE to assess loan risk. If your WALE is too low, you may face higher interest rates or lending restrictions. In some cases, banks can even recall credit. The WALE can be majorly important, but that's what the bank does in order to assess whether you're a worthy lendee.

If you own commercial property, you’ll need to report WALE across your entire portfolio. Using software like Re-Leased can highlight risks and give valuable insights before you buy or refinance.

What WALE reveals about property performance

WALE (Weighted Average Lease Expiry) looks at the leases of all tenants in a property. It’s usually weighted by rental income, but can also be measured by the number of tenant-occupied spaces.

For investors, WALE provides insight into the stability and risk of an asset. A short WALE often means higher tenant turnover and increased leasing costs. In properties with only a few tenants, a low WALE can pose a higher risk to income. However, a short WALE can also signal opportunities to reset leases, raise rents, or upgrade the asset.

WALE scores directly affect property valuation, especially when preparing for a sale.

What makes a commercial property investment strong

The ideal investment is a mix of strong tenants and long-term lease agreements. Together, these are the "golden eggs" of commercial property, the things every investor should be looking for.

Successful, high-yielding investments tend to share common traits. But these qualities aren’t always obvious. They often emerge through careful analysis of an asset’s fundamentals.

High-quality tenants, modern facilities, a strong location, and sound financials all form the foundation of a good investment. WALE helps bring these elements together. It offers a clear snapshot of lease stability and tenant quality.

The primary purpose of WALE is to measure how steady and secure a property’s income is. In many ways, it acts like a credit score for a building and it's something banks pay close attention to.

A high WALE often signals low risk. But it’s not always that simple. WALE doesn’t work as well for single-tenanted properties, and a low WALE can still offer upside like opportunities to increase rent or refresh the tenant mix.

Think of WALE as a health check for your property. A low score usually means more turnover. And turnover affects another key factor: yield, the return you get by dividing rental income by market value.