The outgoings paid for a property that is under lease or property management control will have real impact on tenant enquiry and leasing viability. In simple terms the outgoings for a property should be carefully managed to control property performance.
Here are some things that happen when the outgoings costs escalate in a property:
- The tenants that have a net rent or pay towards property outgoings will have greater pressures on occupancy costs.
- The net income for the property will fall
- Vacancies will be harder to lease
- Leases will be harder to negotiate
It is a fact that most tenants in commercial or retail property today know a lot about how occupancy costs work and the impact on their lease. They know that poorly managed outgoings will have an impact on the rent and other charges that they pay. They also know that the landlord and the property manager will have a lot to do with the results of occupancy costs on tenants over time.
If you are managing or owning a commercial or retail property today, ask yourself this question:
‘What are the averages that apply to property outgoings costs when it comes to the different property types in your town or city?’
If you don’t know the answer then you have a problem. To help a landlord with property performance, the properties that are under management should be controlled within the ‘averages’ of rental return and net income. A property with higher outgoings will be very hard to lease unless the tenant and landlord agree to a gross rental.
Most tenants know that outgoings go up every year; a poorly managed property is likely to impact the tenant’s business costs very quickly unless a containable and predictable gross rental is negotiated. The landlord will also feel the impact of escalating running costs on a property.
It should also be said that older properties can have greater levels of occupancy costs when taken as an average in the area or precinct. The levels of capital expenditure due to plant and equipment failure will also be higher.
So what does all of this say? The commercial real estate broker managing or leasing the property should understand the prevailing market rents, incentives, lease structures, and the outgoings rates that apply to the property type. Real strategies are required by the broker in the lease negotiation to help minimise the threat of vacancy in a property, and also improve the returns for the landlord client.