When you take on a commercial or retail investment property with multiple tenants in occupancy it is critical that you get an analysis of the tenant mix done as soon as possible. You can learn so much in doing so and it can help your client understand what can be done with the property mix for the future.
What you are looking for in the process of checking the tenant mix are the factors of change coming up in the property that could have an impact on property performance and income. There are lots of things to look for.
Why do it?
When you understand the factors of the tenant mix and the leases in a building you can find the weaknesses and the strengths in the property. You can also adopt strategies early to remove any risk that may be evolving over time with tenants and their business activities.
Here are some of the typical weaknesses in a tenant mix that will put pressure on any investment property:
- Leases soon to be expiring
- Rental changes expected at rent review time
- Volatile tenants that should be moved or removed
- Poor lease documentation that could threaten the performance of the asset over time
- Critical dates that could have been missed or may be soon to activate
So the message here is that you can break up the leases and the tenants in a property so you can find the risk exposures in various categories. This is the way I would start to analyse a property in this way:
- Tenant types – Understand the various tenants that you have in the property by type. In any retail property you will likely have a number of tenants in similar business types; you may have too many tenants in a particular type or category of business.
- Good and bad tenants – Decide exactly who the good and bad tenants are in the property. You will need strategies for each. Over time you will be wanting to move or remove difficult tenants. How you do that is a matter of planning and replacement.
- Assess locations – Review the property zones or tenant locations for presentational and functional issues. Give particular focus on the property entrance ways and the common areas. First impressions really matter in any property presentation. Repairs (or the lack of) also matter in that they can send the wrong message about the property and its use or upkeep.
- Critical dates – Within all leases you will have particular dates that will impact occupancy, ownership, and income. Those dates are usually rent reviews, options to renew, rental payments, outgoings recoveries, and expiry dates. Colour code the issues and put them all on a spreadsheet so you can see the interaction between time and occupancy.
- Vacancy issues – Any vacancy can be a problem unless you have a plan to move tenants around and use the space as part of that process. Create a plan to market and lease all of your vacancies to a rental and lease strategy. Set market rents and lease terms that suit the property owner and the requirements of investment over time.
So these 4 strategies will help you get started with your tenant mix review and analysis. Look for the opportunities of change in all tenant mix plans.