In commercial real estate leasing today, the first tenant that you find to fill a vacancy in a property may not be the best tenant for the investment over the long term.
Ultimately you need to consider first and foremost the future of the property, the improvements within the asset, and the investment targets of the client. You can then choose the best tenant by type and market the property accordingly.
The marketing strategy behind the leasing requirement will allow you to drill down into the factors of attraction that apply to the vacancy. You want to attract the best tenants for the location.
So you will need some information to assess about the property, the client, and the local area. The depth and the strength of your research will help you match your services to the requirements of the client and the property
Before you lease the property and the vacancy understand the client first and foremost. The client as the landlord owning the property will have certain targets to recognize including the following:
How long do they wish to hold the asset?
What are the requirements of cash flow from the lease?
Are there other tenants within the property to support the rental return?
In any medium to large property, you will need to review the lease expiry dates, rental structures, and occupancy pressures before you lease any vacancy to a new tenant.
Are there factors of renovation that need to be incorporated into the tenant mix and the lease structure?
Are there factors of risk that need to be incorporated into the property performance plan and the overall leasing strategy?
Has the client diversified their property portfolio across a number of different locations? Diversity brings with it other strategic factors to consider.
In answering all of these questions, you will have a reasonable idea of the best tenant by type and by location. Understand how the tenant will fit into the tenancy mix to strengthen the overall property profile and income return.
Subject to all of the previous questions raised, you can drill down into the best types of tenants that suit the asset and the investment targets of the client. A good tenant for an investment property will usually bring the following factors to the asset:
Stability – Every tenant should be assessed for stability before you commit to lease negotiations. You will need to review their business history, other locations of occupancy, and talk to the key people.
Income – Look at the levels of rental that apply in the local area. Will you be leasing the property on a gross or a net rental basis? What are the market rentals that apply respectively? How can you improve the income over time through rent review structures and strategies? How long should the lease be? All of these questions will impact the income for the asset. Answer the questions before you negotiate with the tenant.
Profile – Some tenants will bring with them a business profile that is attractive to the property. A business brand or a business profile can bring a marketing advantage to the property. Some franchise brands also achieve the same enhancement.
Taking these three elements into account you can do something with your lease negotiation. You can give the landlord some solid reasons to negotiate effectively and directly with the chosen tenant. Most landlords will cooperate when it comes to attracting a new tenant in a stable and strong lease arrangement.
In retail property and shopping centre performance today, the tenant mix and the income created from the tenants in occupancy needs to be shaped and improved over time. That is where ‘tenanting mix orchestration’ is a useful skill to learn and to feed into the property investment strategy.
The suggestion here is that the tenant mix can be shaped and improved. That is certainly the case in retail property performance. That is your job. The landlord will benefit greatly over time by a well-considered and controlled tenant mix.
Every lease and every tenant in occupancy should be looked at in balance with the surrounding tenants, the shopper clusters, and the customer profiles. The terms and conditions of each individual lease should be negotiated to standards that match the investment targets of the landlord.
Anchor tenants – You have to start your assessment around the stability and business activities of the anchor tenants. Look at the lease conditions that apply to each and every anchor tenant in the property. How long are they in occupancy? What are the terms and conditions that apply to their occupancy? How can they integrate their business activities into the success of the overall property?
Customer profile – You can’t move your property to another location. On that basis your customer demographic will be specific to certain incomes, employment, and family profiles. Understand your customer base and how those customers like to shop locally. You may need to undertake a marketing study through the local area to get the most recent and up to date information about customer activity and or future needs. When you understand the customer, you can set the strategies in place for the ideal tenant mix and property profile. You may also be pulling in the customers from outside of the area through tourism and transient people.
Property design – Every property will have factors are designed to understand and integrate into the tenancy plan. Entrance points, common areas, congregation points, and transport drop off points all influence foot traffic and potential retail sales. The tenancy mix should be designed for customer interaction and sales improvement. That base strategy requires you to put the right tenants in the right locations. You will have a mixture of small and large tenancies to consider. You will also have tenancy locations requiring special consideration such as food retailing, fashion retailing, entertainment, and services. You can get plenty of ideas by looking at other comparable properties locally or regionally.
From these three simple concepts, you can set in motion a comprehensive tenancy mix plan and retail sales strategy. Understand the property, the tenants, and the customers. Balance at equation so that the landlord can optimise rental returns and minimise vacancies. That is what tenancy mix orchestration is all about.
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In commercial real estate today, the leasing process will offer a typical agent or broker with many leads and opportunities servicing local landlords and property investors. Over time that leasing arrangement can be the precursor to selling properties for the same client.
So the smaller commissions earned in the leasing process, can give you the opportunity to move on to a sales commission with the same client in the future. One thing can lead to another when it comes to working with different clients and high quality properties. Be selective when it comes to choosing the right properties to lease.
Establish long-term relationships
Commercial real estate is all about building relationships with the right people, and the leasing service that you offer today can help you start that. Be selective when it comes to establishing long term relationships with the right property owners. It stands to reason that the quality of your leasing service can help you convert more clients over time. To find those clients in the first place, it is a matter of understanding the factors of attraction when it comes to office leasing. Why will someone use you as a local property leasing expert?
Here are some ideas to help you build on that opportunity cycle in a professional leasing service; to help you work for those high quality for property owners and investors in your local area:
The size of your tenant database – It is a fact that the size of your database of tenants will help you attract landlords when they require a vacant property filled. Market your services to landlords using your database as a factor of attraction.
Property pressures – Some tenants and businesses will be put under pressure when it comes to property occupation; changes in the economy or business sentiment can do that. You can find those tenants by staying in constant contact through a direct approach, be it in cold calling or door knocking. Look for those businesses that are under pressure.
New People – Generate leads and opportunities every day in your local area; make it a priority to meet new people in your territory. When visiting one property or business in any location, leave your business card with nearby businesses inviting future contact if they have a property pressure issue or need to relocate.
Lease expiry – As part of building your database, track the upcoming lease expiry and option dates in every major office building and with every good quality tenant. The only way you will know those dates is in making the regular cold calls to local businesses. When you know an upcoming lease expiry or option date, you can work the tenant in the 12 months leading up to the critical date. Relevancy is a way of attracting their interest; they will have a need to understand market rents, vacancy factors, new property developments nearby, and lease incentives. A tenant will seriously consider relocation if the current pressures of occupancy are high; that can be in rent levels, available space, car parking, transport, customer locations, and occupancy costs. Ask the right questions and you will soon find some pressure points that may interest them.
Current vacancies – Some landlords will have a problem with current vacancy levels or upcoming vacancies. Look for properties that appear to be under vacancy pressure; contact the owners directly to see if you can help.
Rental and leasing strategies – When you know a lot about lease and rent structures you can offer real strategy as part of leasing a property. Some landlords have little understanding of the ways to improve property returns and cash flow through a lease; they will just focus on finding a tenant. You can explain to the landlords that you serve how a gross or net lease can bring benefit to their property returns, and you can add some strategy around rent reviews, options, relocations, renovations and occupancy costs.
So as you can see it’s quite easy to offer a professional leasing service to landlords in your area. Lift your leasing skills and market yourself as the property expert that the landlords and property owners require.
A vacant tenancy in a retail shopping centre can be massive drain on retail business and customer sales for all the tenants surrounding it. For this reason a vacant tenancy has to be resolved quickly and efficiently.
If you have too many vacant tenancies in the one property it can set the foundation for a decline in retail trade. Customers like to visit a property that is attractive, vibrant, convenient, and that has the required tenant mix. Vacancies can impact that profile.
Over time a decline in customer sentiment will have an impact on market rental for the landlord. Your primary focus in leasing and managing a retail property should be to maintain occupancy at a sensible market levels.
To lease a vacant tenancy some real strategies are required. In a ‘rising market’ the leasing process is not so much of a problem, but in a ‘slow or declining market’ the vacancy challenge can be significant. Here are some rules to help the process.
Stay very close to the existing tenant mix and the leases supporting that mix. Some tenants will from time to time have challenges and problems in business or occupation. Keep communicating with the tenants regularly to understand their challenges and help them through any occupancy issues. In a ‘down’ market, a vacancy can be very hard to lease. It can be a drain on rent and outgoings for a very long time.
Make sure that you are working well in advance when it comes to lease renewals or option negotiations. Most leases will have time provisions that apply to the renewal or the option process. That being said, there is nothing to stop you working earlier with the tenant to achieve a satisfactory renewal or option agreement.
Some existing tenants in the property may require expansion or relocation. Be open to their business needs, and identify alternative locations within the property that may suit or solve the expansion or relocation problem.
Review other properties in the local area that may be competing with you and your tenancy mix. Look for the challenges and the opportunities existing in their tenancy mix. Approach their more successful tenants to see if relocation is possible.
Given the sales performance of your current tenancy mix, look at the segments that are quite successful and the others that are not so. There will be reasons for a tenants result in sales. It could be the product or service offering, the tenancy location, the tenant themselves, or the marketing process. Some of these things can be solved through careful management procedures.
Monitor the clustering affect within your property where some tenants seem to be feeding sales off each other. The mix can be improved through improving the clustering process. Identify the tenants that can work with each other with the same customer type. For example, a coffee type tenant could be placed alongside a ladies fashion tenant and a ladies shoes tenant. A coffee tenant would be extending the customers time in the general area and potentially the sales potential.
Consider the placement of the anchor tenants in the property and how they interact with specialty tenants nearby. Proximity to the anchor tenant will be a leasing advantage for some tenancy types.
Create a tenant retention plan that encourages ongoing occupancy for those priority tenants in the mix. The retention plan will also help you when it comes to replacement strategies and removing poor performers from the mix.
Leasing decision should be based on available occupied space, the prevailing market conditions, market rental, lease incentives, and occupancy costs. Stay ahead of these industry trends and challenges. Look for any new or upcoming property developments that could interfere with or change these factors.
If you do have a vacancy in the property, and a long term lease seems to be difficult to achieve, look at all short term occupancy opportunities with some of your other tenants, or casual tenants from elsewhere. Short term occupancy at a lower rental will still help you achieve the vibrancy in the property and maintain the customer’s interest.
It is important that every commercial property has a lease strategy to support ongoing cash flow and reduce vacancies. These strategies should be integrated into the business plan for the property and for the landlord.
It is of note that a single lease for a new tenant should not be looked at in isolation. It should be looked at broadly with due regard for the surrounding tenancy mix, the income required for the property, and the impact that the long term occupancy may have from the initial term and into any option period agreed.
Here are some ideas to help you consider the leasing of a commercial property:
Assess the local area for competing properties. Some of those properties may be taking or attracting your tenants now. Look at those competing properties to see what is happening when it comes to vacancy profile, tenant mix, expansion and contraction, and the lease marketing strategies. Your property will need to be equal with, if not better than, those competing properties.
Assess the market rental through the local area so that you can create attractive lease packages for incoming tenants. When it comes to leasing, the start rent is not as important as the cash flow over the lease term. The starting rent should be regarded as something of attraction to create lease occupancy.
The rent review structure over the lease term will give strength to the cash flow for the landlord. The best way to assess ongoing cash flow is through the calculation of the lease and its net present value to the landlord for the duration of the lease. You are therefore assessing the income over time, not just focusing on the rent today.
Some landlords prefer not to give options for renewal. This is certainly the case when it comes to a quality or larger property where the landlord wants to retain flexibility in the tenancy mix. Many landlords of the larger shopping centers will avoid giving options to tenants for ongoing occupancy. The reason for doing this is that they like to move tenants in and around the property based on tenant mix and clustering. When they move the tenant, they can improve the overall cluster and general area including the other tenants. This will then have further benefits for the overall income return for the landlord.
When you negotiate the necessary rent reviews in a lease document or new occupancy, mix the rent reviews appropriately so that the landlord gets a sensible and realistic increase in net rent income. The rent review methods available will be variable such as market rent, fixed dollar increase, fixed percentage increase, or something that is indexed to the consumer price index. You can make the right choices based on the property type, the landlord, and the legislation or property laws that apply to lease occupancy with that tenant situation and property type.
If you manage or lease a property with a number of tenants in occupancy, look at the overall lease profile and expiry dates over the long term. Any lease that is to be expiring inside the next 18 months should be focused on now for lease renewal, lease expiry, tenancy change, expansion, or contraction. Start talking to your tenants early so that any appropriate changes to the occupancy can occur with measured and structured negotiations. Whilst the lease document may provide for certain other time frames on lease renegotiation, there is nothing to say that you cannot start this process early.
Keep in close contact with the current tenants in your property. They will have pressures of occupancy and on that basis it is better for you to work with those pressures than let the tenant move to another nearby competing property. Keep talking to your tenants on a monthly basis to understand exactly what they are thinking and doing as a business. Help them stay with the property for the long term if it suits the landlord’s situation.
The leasing of a commercial or retail property is relatively straightforward when you follow the rules. You can create a checklist with the above matters and other things relative to the property type. Control is everything when it comes to making a lease strategy and structure successful for the landlord.