In commercial and retail property, the market rent review can be quite challenging. There are many variables that can apply to the review process. As a property manager or leasing manager, it is important that you gather all the correct facts in preparation for the market rent review process.
So, exactly what is a market review? It is the establishment of a rental taking into consideration similar rentals with similar properties in the same general location. Unfortunately, this process can be difficult and slow given that many other properties are not directly comparable. In some cases, your particular property may be so unique that you will need to look well beyond the local area for comparisons and market rental evidence.
As part of the process of gathering information, keep your notes regards findings and assumptions. When it comes to a rental dispute, these notes and findings will be supportive of your rental choices.
So here are some ideas to incorporate into the market rental review process:
Review the lease document fully before you start the process. Understand all the terms and conditions of the lease document with particular care in identifying critical dates connected to the review. Some of these critical dates will need to be satisfied and adhered to as you negotiate between the landlord and the tenant. Time can be of the essence when it comes to responses and notices in the review process.
After you have reviewed the lease document, visit the property and inspect the premises internally and externally. Take many photographs as evidence of the existing conditions of occupancy. As you move through the review process, these photographs will help you identify and match the tenancy to other relevant properties.
When you look through the tenancy, understand the premises as supplied to the tenant by the landlord. You cannot take into account any factors or improvements of occupancy provided by the tenant within their own fitout. The rent review applies to the premises as supplied to the tenant by the landlord at the commencement of lease. Go back to the lease negotiation file for information in this regard.
If the tenant occupies space within a large building, it is possible that you will have other market rental evidence within the single property. This will be of great assistance if that is the case.
Any rental evidence that you are given or find in and from other properties, should be qualified to understand that the rental is truly on the basis of market evidence. There is no point in using rental information that was generated from review methods other than the market process.
Other situations of market rental evidence may be biased or skewed due to the impact of lease incentives negotiated between of the landlord and the tenant in particular buildings. If any lease incentives were provided in those comparable transactions, the value of the incentive should be removed from the calculation so you can truly understand the effective rental in each particular case.
Inspect the premises located in other properties that you believe are comparable. Take into account the factors of occupancy, services and amenities, property access, lease terms and conditions, permitted use, and length of lease in each case. Property managers will usually share information to assist you in your market rent review. A reciprocal process of information should apply at a later stage when they need help with their property.
This list can be expanded subject to the factors of property type, lease terms and conditions, property age, and market evidence. Expect that the process of review will take time so start the activity early.
When you work in commercial real estate as a broker or agent, the fact of the matter is that you are serving a number of clients and helping them through the challenges of property performance and liquidity. Here are some tips from our Newsletter for Commercial Real Estate Agents.
If you are managing a lot of properties at the same time, it becomes a real challenge to administer the issues related to firstly performance and secondly the liquidity in all the different and diverse properties. Every property owner will have different rules and regulations relating to their lease management, cash flow, and approvals process.
To define both of these important matters:
Property performance is in how you optimise the result the property. Performance can be a number of different things including income, reduced expenditure, tenant mix, tenant retention, and market rental.
The liquidity of the property is the ability to sell it at any particular point in time and the properties attractiveness to the market in general. Throughout the given year, liquidity will vary given the pressures of the economy, and the rates of enquiry that are coming in from buyers.
Today we have a property market that is under some pressure. The global economy is creating some difficulty for many local businesses. That has an immediate flow through to the tenancies in our managed properties. This is where the leasing manager or property manager can provide a high value service to their clients through a tenant retention plan.
The tenant retention plan is designed to identify the critical tenants within each and every property, and then manage them to optimise rental income and minimize vacancy risk. Experienced property managers do this very well and will usually have a tenant retention plan as part of their toolbox of services.
To implement a simple tenant retention plan the following rules can be adopted:
Take the individual property and look at all the leases for each and every particular tenancy. Identify the critical dates that will have impact through the term of the leases and look for those dates that will be related to rent review, option, or lease expiry.
Given these critical dates, look at the next period of 24 months and track any dates that are inside the ongoing 24 month timeframe. The dates related to the exercising of option, or the negotiation of lease expiry will require action as early as possible. There is nothing wrong with negotiating early in each case.
Some tenants within the property will be regarded as more important and critical to the tenant mix. Any negotiations with those tenants should be optimised through attractive terms and conditions that the tenant will find hard to refuse. Any new lease can pick up the growth of the rent for the landlord subject to a strategy and the required holding strategy.
If your property has any anchor tenants, those tenants should be closely monitored for business stability and interaction within the property. Successful anchor tenants create an immediate flow through to all other tenants and give confidence to the property function and identity. Support your anchor tenants at each and every opportunity.
Attention to the tenancy mix and the retention plan will help you through difficult times with the performance of a property. When well maintained and managed, a property will always be saleable and attractive as an investment if a sale has to occur. Property investors and buyers like to see a stable tenancy mix supported by professional lease and property management.
When it comes to commercial property management and leasing today, the factors of tenancy vacancy are something that you would normally want to avoid. The basic object of property performance is to stabilize and grow the income base from the tenancy mix. When businesses and tenants are under pressure, you need some real strategies to renew leases early for all the good tenants within your property. Here are some ideas from our Newsletter for Commercial Agents.
Tenant Retention Plans
This can simply be called the development of a tenant retention plan. It is a service that can be provided by the commercial property agent to the landlords that they act for. The fees to be achieved from renewing a lease with the sitting tenant are usually less than those which you would get from a new tenant coming to the property. However, the fees are contained and readily available for the proactive agents offering tenant retention services.
So here are some strategies available for optimizing the current tenancy mix and renewing existing leases.
Keep close eyes on all leases coming up for expiry or option inside of the next two years. Understand the high priority leases that will expose the landlord’s cash flow to instability. All of these identified leases should be tagged for early renewal and negotiation. It is necessary to work with the landlord and the tenants regard future occupancy needs. There may also be other factors such as property refurbishment to consider as part of the lease renewal.
If your property involves anchor tenants, these leases need to be protected at all costs. They are generally leases for very long lease terms over sizeable space; however any pending expiry and loss of the anchor tenant may totally destabilize the property and all smaller tenants. Anchor tenants are very special when it comes to maintaining property performance.
The clustering of tenants within the tenancy mix involves considerations of tenancy size, tenancy offering, and businesses of similar type. The clustering of tenants can occur in office or retail property and will be based on the expectations of the business community and the local customers. The successful clustering of tenants will improve the business identity and vibrancy of the property. The net result is improving rental.
Some of your tenants at lease renewal time will require a modified occupancy including more or less space. This may require negotiations with adjacent tenancies or total relocation to other areas within the building. Either way the process works as long as you are working well in advance with all the relative tenancies and their occupancy needs.
A top performing property is the result of careful lease management strategies applied in balance with sensible property financial management. When it comes to the times of a tougher property market, these factors are highly important.
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