How to do a Vacancy Risk Assessment in Commercial Investment Property

cbd office building facade

The vacancies in any commercial or retail investment property will have a radical and direct impact on cash flow in many different ways. It directly follows that a vacancy assessment should be undertaken regularly as part of a property performance strategy and planning process. That can be part of a property management and or leasing service.

(N.B. these ideas are also sent out to regularly to our friends in Commercial Real Estate Online Snapshot to help amplify brokerage results…. Get your access here)

It could be said that a vacancy assessment in any investment property is initially more important than the actual levels of market rental achieved in the property. Any vacancy will have a drain on the cash flow for the asset over time.

Actions to take?

So what do you have to do here with this? You need to look at the threats to the occupancy within the asset, and the stability of the income stream for the immediate and predictable future. Some assumptions should be made and the conditions of the local property market should be observed.

A Vacancy Checklist

A checklist approach for vacancy situations will help you with that listing assessment and control.  You can then find the occupancy issues that will stress the income stream over time in any asset.

Here are some ideas to help you with this:

  1. Why are there vacancies existing now in the property? Sometimes you can identify clear matters of fact or threat that apply to the existence of vacancies. Perhaps the property has been poorly managed or leased over time. Perhaps the tenants are being influenced to move to other newer developments nearby. One other very clear and all too common problem is that of the volatility levels that the tenants may have in occupancy with any landlord owning the asset. Aggressive landlords and pressured lease situations tend to lead to higher levels of vacancy over time. Ultimately the tenants will always have the ability to leave the asset when the lease comes to an end.
  2. Where are the vacancies? In any building or property containing multiple tenancies, look at the location of the vacancies and determine the differences. Some locations will be more attractive than others when it comes to finding new tenants and creating occupancy interest.
  3. Will there be more vacancies coming up in the future? Review all of the leases in the asset, so you can understand where the occupancy threats may exist over the next 12 months and over the next few years. Ask questions about tenant retention and lease negotiation. Ask questions about standard lease strategies and occupancy predictions. Is there are tenant retention plan for the asset?
  4. Where are the competing properties locally? Look into the location comprehensively so that you can understand where any competing properties and vacancies may be located. Also do an assessment of upcoming new property developments for the location. What will be the supply and demand for space over time? Where will the threats be when it comes to future occupancy? The older properties usually suffer with higher vacancy levels when a new property development is released into the area.
  5. What do the tenants think about the property today? What do the tenants think about the landlord? They are interesting questions requiring specific answers. A poorly maintained property will soon impact the occupancy intentions of the tenants at lease expiry or option time. The tenants will always understand the levels of response and maintenance within the asset that they occupy. They will form an opinion when it comes to the landlord and the landlord’s asset. Any landlord that cuts corners or fails to respond when it comes to property maintenance will soon see a decline in occupancy as leases come to an end. Tenants are smart, and will make their occupancy choices based on property convenience, property relevance, occupancy costs, and also the involvement and cooperation of the landlord when it comes to the tenant and their premises.
  6. What are the vacancy factors for the location and the property type? In any town or city, there will always be vacancy factors and ratios impacting property investment and occupancy. Understand the levels of supply and demand as they apply within the city and precinct. Look at the levels of business sentiment underpinning business growth, relocation, and occupancy needs. Can it be said that the levels of business locally are thriving, stable, or declining? Are they segments of the business community that are more successful than others? If that is the case, then you should be focusing your prospecting and tenant contact processes into the stable property segments offering the most occupancy opportunity and tenancy churn.
  7. Is there a tenant retention plan within the property and how is it managed? They are interesting questions to ask. Many landlords and property managers fail to implement a tenant retention plan as part of a property performance strategy. In any property with multiple tenants in occupancy, a tenant retention strategy and plan is absolutely essential to ensure that the income stream is protected and encouraged over time. Understand the differences between the tenants that you have in your building, including their strengths and weaknesses, and then determine the strategies that should apply in each case as part of a tenant retention plan. Some tenants you may wish to keep and others you may wish to remove from the property.
  8. What is the existing tenant mix like? Assess the existing mix of tenants and their placement around the property. Can things be improved? Should some of the tenants be moved into better locations within the property where the rental can be improved as part of the tenancy mix review? In larger properties, it is very common to move tenants around as part of a property renovation and relocation strategy.

In saying all of these things, the commercial property market changes regularly and frequently. There will be times when the market is favourable for tenants in occupancy; there will be other times where the market is landlord favorable.

Monitor the property situations of supply and demand that apply locally and the different asset categories such as office, industrial, and retail. As part of that you will see how the factors of vacancy are shifting and changing in the property categories and with particular property assets.

(N.B. these ideas are also sent out to regularly to our friends in Commercial Real Estate Online Snapshot to help amplify brokerage results…. Get your access here)

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