In commercial real estate leasing and property management, you should expect to have a few vacancies each year in the tenancy mix. Allow for a certain number of vacant tenancies and adjust your property performance accordingly. It is interesting to note that aging properties will have a rising vacancy factor; the only way you can combat that fact is to maintain the property well and manage the leases with care. Redundancy in a property will at some stage take over, but a well-managed property can hold tenants in occupancy for quite some time.
Full occupancy is a good thing, but you cannot usually keep every part of your property occupied. It is sensible to budget the property cash flow for some vacancies based on the leases that are to expire in the property. Here are some things to look for in property performance and vacancy management:
- Tenants looking for more space to trade from
- Tenants looking to contract their business operations and downsize
- Competing properties may be taking or attracting some of your tenants
- Incentives in the market that are influencing tenant movement and relocation
- Shifts in market rental that will change the commerce of net income for the landlord
- Options for lease renewal coming up that have not as yet been actioned or committed
- Aggressive market rents that could make a tenant move premises for better value in occupancy
Some of those leases may be renewed or renegotiated, and others may achieve new tenants taking up a new lease, but the fact of the matter is that most properties with a moderate to larger tenant mix will have a vacancy most of the time somewhere. This means that you will lose some rent and some outgoings recovery. If you allow for these things in the budget you can prepare the property and the landlord for the cash flow pressure.
I now go to the point that a healthy commercial or retail property is one where you have some vacancies coming up or active most of the time. It gives you the ability to shape the property and offer space to existing good tenants that may need to change or expand their occupancy. In that case you have leasing ‘flexibility’. If you cannot offer your existing tenants ‘flexibility’ they will move to another property.
On a final note, watch out for the expiry and changes of an anchor tenant in your property. An anchor tenant is a large tenant and they will pay a larger percentage of the overall gross rental of the property. Always negotiate your anchor tenant lease issues early so you can identify if you have a lease challenge coming up that can impact the property in a major way.
The key to successful property performance is in working well ahead of issues and keeping the tenants relatively happy in occupancy. That is what good lease management is all about.