Pain Points in Managing Commercial Property

In this current property market, the management of commercial property is becoming more significant and important than ever before. When a property is well managed, the impact of property pain on the landlord becomes less.

In most circumstances a well selected real estate agent that is experienced in the type of commercial property to be managed, is best placed to balance the trends of the local property market into the management and leasing requirements of the property.

Landlords should choose their managing agents well based on the agents experience and skill; not low management fees. A poorly chosen property manager can destroy the financial and physical performance of a property in a very short period of time.

The pain points in managing commercial property today are also the points that need to be closely monitored by both the landlord and the real estate agent:

  1. The vacancy factor within the property
  2. Well controlled building outgoings
  3. Stability of tenancy base
  4. Well balanced tenancy mix
  5. Refurbishment and renovation plans to optimise the property

In dealing with these issues, the following should be said.

The vacancy factor in a commercial property has to be minimised based on the future plans of the landlord. The only time you would want a vacancy, is when their property is due for renovation or redevelopment.

Vacancy Factors

The best way to work with potential vacancies within the property is to closely monitor the existing tenant mix and the existing leases. There is nothing wrong with renegotiating leases 12 months or two years out from the expiry or option capability. Both the tenant and the landlord will benefit in the process. A stable and well performing tenant should be encouraged to remain in occupancy at a fair and reasonable rental. You can then remove the volatility of the vacancy on the property cash flow.

Well controlled building outgoings are demanded by tenants today as part of their occupancy cost. Tenants expect the landlord to maintain sensible levels of building performance yet not exceeding the averages of building operational expenditure. High building outgoings will drive tenants away from the property.

To achieve well controlled building outgoings, it pays to have a building budget and business plan that is approved and locked in by the landlord prior to the commencement of a financial year. After the commencement of financial year, the budget is checked each month for accuracy against the actual costs being incurred.

Importantly the expenditure budget is not excessive and is appropriately timed to the seasonal pressures on building performance. Well controlled building outgoings attract tenants to your property and provide stability with existing tenants in tenancy mix and occupancy.

Property Managers Role

In this current property market, the property manager has to be very mindful of maintaining a strong and stable tenancy base. Well performing existing tenants are like gold in this market. As part of the process of working with existing tenants, the landlord should be mindful of sensible levels of rental that maintain occupancy and reduce the threat of vacancy.

Retail Property

Every property with multiple tenants will have a tenancy mix that should be carefully considered. This is absolutely critical when it comes to retail property. The placement of tenants within the tenancy mix and in proximity to each other should be carefully based on the requirements of the area, existing customer base, and functionality of the building.

Refurbishment and Renovation

At some stage in the lifecycle of the property, refurbishment and renovation will become an issue. This requires planning and integration into the existing tenancy mix, lease expires, and landlord investment plans. It is not unusual for renovation and refurbishment strategies to be planned over four or five years leading to the critical window of time. This is where the experienced property manager acting on behalf of the landlord can add real value to the planning process.

Commercial Property Leasing – Pain Points to Lease Negotiation

When leasing commercial or retail premises there are certain points of negotiation that always create pain for the parties concerned. Here are a few of the big and most common ones:

  1. The landlord wants a high starting rent
  2. The tenant wants a big incentive
  3. The tenant wants a huge option term for further potential occupancy
  4. The landlord wants a tenant but is not prepared to provide an incentive to attract them to the property
  5. The last tenant left the premises in a mess and the landlord will not fix it up until a new tenant is found
  6. The landlord will not refurbish the premises before they have a tenant on a signed lease
  7. The tenant does not want to give any form of guarantee as security in the case of any default of lease

These are the most common problems for the average lease negotiation. Most landlords also think that their property is better than anything else around and on that basis will not negotiate down on any rent to get the premises let. So often you hear that the landlord is prepared to wait it out and see what the next tenant will offer.

In this market there are limited numbers of active tenants looking to relocate to new premises. In some cases there can be 5 properties available for every tenant to choose from. Urgency in the lease deal is not high from the tenant’s perspective; landlords need to know this. They may only get one tenant to make an offer for the premises.

When it comes to leasing premises it is not where you start your lease and rent, but it is more important to know where you are headed and where you will finish. Rent reviews during the lease term can take care of rent escalation to improve the lease, providing the real estate agent negotiates the lease well.

So what can you do with this list of common leasing problems? The best way is to use the pain of the vacancy (in the case of the landlord), or the pain of the need for new premises (in the case of a tenant) to move the deal forward. You should work with the offer that you have and not hope that another will come again soon to replace a low offer today.

Take today’s lease offer and turn it into a valuable lease over the term. Show the landlord the real value of the lease by doing an analysis of the deal using a net present value approach on the lease cash flow over the lease term. It is remarkable how the landlord will soften their negotiation position when long term lease value is explained in numbers.