For anyone that isn’t in the investment property business this probably seems ridiculous. Some money coming in is better than no money coming in, right? Well, not exactly. Here’s how it works if you are the owner of investment property – meaning you wish to make income from your commercial properties.
Trust me, it isn’t as simple as just wanting to make sure you have a certain amount of cash flow per month, which is also important. It really has more to do with a few other factors such as:
1) Commercial leases are generally longer than a year, so the landlord is often locked into a low rate for three to five years.
2) The value of the building is tied to the income it is generating. If the income is well below market, the value of the building will be well below market and with the long leases that can’t and won’t change until the income increases.
3) Banks also take the income into consideration. If during the time you have the under-market leases in place, you need to borrow against the building, you will only be able to borrow against the appraised value. And you guessed it – that is also based on the income the building is producing.
4) Many times, investors buy buildings to hold for three to five years then sell and buy another building. It’s part of a long-term investment strategy. However, if the value has decreased due to the low income from leases, it impacts their ability to sell it for a profit and invest in another building.
5) Most investors (and even some banks require it) have money in savings or escrow to cover a certain number of months of vacancy. It isn’t wise to get into investing in commercial real estate without a contingency plan in the event of a tenant default or long-term vacancy.
All of this to say, the next time you are out looking for a lease and think you found the deal of the century because you’ve been watching a building sit vacant for a long time, there may be a reason the landlord is choosing to accept the vacancy rather than get into a bad long-term deal.
If you happen to see a building with a lengthy vacancy, those are the kind of people we love to talk to. One of the things we like to do for Landlords is evaluate their vacant space. We’ve found that there are a few reasons why a space sits vacant, in most cases.
1) It isn’t priced right for the market
a. Usually this is due to over pricing, but occasionally it’s underpriced so it’s overlooked. Sometimes tenants assume there must be something wrong with it or it doesn’t show up in their search criteria.
2) The marketing isn’t reaching enough or the right people.
3) Offers have been received, but not accepted might indicate that something is going wrong in negotiations.
4) Location. This really is a factor. You can have a great building in a bad location, and it is just going to be harder to lease.
5) The condition of the building is subpar. Thankfully, this is something that can be fixed if the landlord is willing to spend money to bring it up to standard condition for the price being asked.
If you or someone you know has space in either a single tenant building or a multi-tenant building and could benefit from an honest evaluation of the lease-ability, pricing, or market conditions, we would love to talk to them.