Most commercial property owners today will focus on income generation opportunities and that in many cases means rental growth or at the very lease rental stabilisation. To get a reasonable rental return in a commercial investment property it a fine balance of strategies is required and that is where the experienced commercial real estate brokerage can offer some real value and momentum to clients.
Key Performance Indicators
A good brokerage will have and bring together a selection of experienced people that understand the key performance indicators and systems behind:
- Rent optimisation
- Tenant occupancy
- Lease management
- Outgoings recoveries
- Expenditure budgets
- Risk management, and
- Property Forecasting
Managing and leasing a property with one tenant is not a big issue for any commercial real estate business; but when you bring together multiple tenants in the one property all occupying premises on different lease terms and conditions, you have the pressures of property control and performance to consider. The age of the property and the property type will also dictate physical and financial methods of control and standards to be implemented.
Property Controls to Improve Rent
There are major differences between retail, industrial and office property types when it comes to rental opportunity and income optimisation. Here are some ideas to help you establish property controls within those property types to help boost rental and occupancy in your clients’ properties:
- Lease standards – Every property is unique and on that basis every high quality property should have a lease designed for the asset and the landlord’s investment plans. The property owner should involve their legal team to identify the best clauses and conditions to apply to the typical leasing situation. From that point a standard lease can be created for the asset. That document would then be the base foundation of every lease negotiation and tenant occupancy.
- Market rentals – Should the property be leased on a gross or net basis? That decision should then allow the agent to compare the levels of market rental locally for the property type. Are the local rents rising or falling? What is the predictable supply and demand for leased space in the property type? Over supply will soften market rentals. Under supply will boost market rents and minimise incentives.
- Vacancy factors – Every property should be reviewed quarterly for the threat or impact of upcoming leasing vacancies. Some tenants will be leaving the property for any of a number of reasons; that process should be tracked and managed. Some tenants will be critical to your client’s cash flow, the tenant mix, and property stability. Watch for the threat of lease vacancy and adopt a forward planning process to negotiate leases early.
- Outgoings recoveries – When possible a lease should be negotiated with a view to recovery of outgoings from tenants. How you do that will be through the rent structure and choosing the right lease documentation. Before you start the leasing negotiation with any tenant on a vacant part of the property, understand the rental standards and levels of outgoings that apply locally to the property type. Are you within the acceptable ranges of market rental and outgoings recovery?
- Rent review methods and timing – Will you be reviewing rentals annually or every two years? On that basis how will that review be conducted? Form an opinion on growth of market rental locally; take into account the predictable factors of supply and demand that will impact market rents. If market rents are unstable, then it is best to set a rent review process in the negotiated lease that avoids market rent assessments. Usually the best way to go with that situation will be fixed percentage increases or fixed amount increases.
- Options for further terms – It’s not always a good idea to negotiate the provision of a lease option in a tenants lease; it can be a bad thing from a landlords position. Higher quality properties and particularly larger offices and retail shopping centers will typically avoid giving options for an extended term of years where they are legally allowed to do so.
- Choice of tenants – Some tenants are better than others when it comes to the performance of the property financially and physically. It’s a simple factor to watch in lease negotiations and choice of tenants. Position your good tenants in parts of the property where rent and occupancy exposure help boost income returns. Also review your good tenants to ensure that you are protecting their future occupancy and lease stability. Look for any predictable requirements of expansion or contraction with all of your tenants. It is better to help your good tenants through lease change than to lose them to another property.
To improve the rental income in any commercial investment property, these factors of property function will help in a major way to boost rents paid and rents expected from tenants and leases.