Understanding commercial property leasing strategies
Leasing strategies play a crucial role in maximising the returns and optimising the value owners can achieve from their commercial investment properties.
Each strategy encompasses a range of approaches that help determine how a property will be leased to a tenant. Of these strategies, rollover strategies are prominent, but they may not always be the most beneficial.
Let’s look at the different leasing strategies available and the pros and cons of each to help commercial property owners make an informed decision when it comes to the suitability of their investments.
This strategy involves leasing a commercial property for a shorter period of time, with the expectation the lease will be renewed when the existing lease expires.
Rollover strategies are a common method used, as they allow property owners to adjust rents based on the market conditions at the time of lease expiry. However, there are risks involved. Let’s take a quick look at the pros and cons.
Benefits of rollover strategies
- Rollover strategies provide flexibility, enabling property owners to adapt to changing market conditions
- Property owners can potentially capture higher rental rates and maximise their income if there is increasing demand for the type of property they own, rising markets and stronger rental yields
- More frequent lease turnovers can facilitate adjustments to the tenant mix, potentially attracting higher-quality tenants
Disadvantages of rollover strategies
- Owners might find themselves at risk of vacancy should market conditions deteriorate or tenants choose not to renew
Net lease strategies
Net leases require tenants to pay a portion or all of the property outgoings and operating expenses such as property taxes, insurance and maintenance costs along with business operating expenses in addition to their agreed rent.
Let’s take a look at the pros and cons of using this strategy.
Benefits of net lease strategies
- Property owners reduce the expenses involved in holding the property, leading to higher rental yields and less financial uncertainty
- Net lease strategies provide a consistent income stream for the property owner
- Increases in outgoings such as council rates, land tax and building insurance can be recovered from the tenant.
Disadvantages of net lease strategies
- Property owners may have less control over the management and maintenance of their property given this requirement now sits with the tenant. As a result, things that need attention may potentially go unfixed, leading to damage or disrepair
- Some tenants may be hesitant to enter net lease agreements due to the added cost involved. As they are paying property outgoings, they may try to negotiate a rent which is inclusive of these costs. In the current market where land values have been rising, the fluctuation in outgoings will result in a lower net rental income for the owner.
Percentage lease strategies
Commonly found in retail properties, percentage lease strategies require the tenant to pay a percentage of their gross sales in addition to the base rent. As a result, both owners and tenants have a vested interest in the property. Let’s look at the pros and cons of this strategy.
Benefits of percentage lease strategies
- Property owners have the potential to increase their income and benefit from the success of high-performing tenants
- A net lease strategy encourages property owners and tenants to work together to ensure the commercial property’s success as tenants are incentivised to maximise their business sales and revenue as their rent is directly tied to their business performance
Disadvantages of percentage lease strategies
- Tenants are likely to negotiate lower base rents compared to traditional fixed rates on a net lease strategy because of the additional income they are paying as a percentage of their gross income to the property owner
- Tenant sales can fluctuate leading to potentially less steady income streams and the total income the property owner can earn. As the amount earned will vary, this makes it difficult for property owners to budget and plan ahead
- Tracking and verifying tenant sales requires additional administration which can become costly both financially and in terms of time involved in managing this process with the assistance of a leasing agent
Seek expert advice on the best leasing strategy for your commercial property
Leasing strategies are an essential tool for commercial property owners and investors to maximise their returns and increase the value of each asset
While rollover strategies offer flexibility, they come with risks and may not be suitable for all types of commercial properties. Long-term leases, net leases, and percentage leases provide stability and predictability but also have their own drawbacks. Your chosen leasing strategy should align with the property type and take current market conditions into consideration.
It’s always recommended to seek expert advice from the asset management team at Commercial Collective when it comes to carefully considering and choosing the best leasing strategy for your property. To contact our asset management team, click here.