Practical observations from decades of commercial real estate work.
Practical observations from decades of commercial real estate work—underscoring the depth of experience behind The Commercial Real Estate Advisory Series.
The large vacancy disappears, but existing tenants—and prospects—may begin looking elsewhere because adequate parking has quietly disappeared.
Two buildings may each be 100% occupied, yet one may be worth substantially more than the other. Lenders and investors look beyond occupancy. They evaluate the financial strength of the tenants, the stability of their businesses, and the likelihood that lease obligations will be fulfilled throughout the lease term.
A long-term lease with a financially strong tenant can significantly enhance a property’s value. A lease with a tenant whose income depends primarily on donations or uncertain funding may not provide the same confidence, regardless of occupancy.
Financial pressure can tempt an owner to sign a long-term lease with below-market rent, no scheduled rent increases, or limited reimbursement for taxes, insurance, and maintenance.
The immediate problem is solved. The long-term value of the property may not be. Those lease terms can also affect refinancing opportunities and a lender’s willingness to modify existing financing.
Even when operating expenses are partially reimbursed, a lease without annual rent increases gradually erodes purchasing power. Property taxes, insurance premiums, maintenance costs, labor, and everyday living expenses continue to rise while rental income remains unchanged. Time rarely improves that equation.
Commercial tenants communicate with one another. If one tenant receives concessions that others do not, similar requests often surface during future lease renewals. Today’s exception can quickly become tomorrow’s expectation.
Every lease should be evaluated not only for the income it produces today, but also for the value it creates—or destroys—for the property tomorrow.
Are you filling today’s vacancy… or creating tomorrow’s problem?
When we are searching for tenants, it’s easy to become captivated by the amount of space a prospect needs. Large users of commercial space are difficult to find, and filling a major vacancy can feel like a tremendous accomplishment. But size alone should never determine whether a tenant is the right fit.
Over the years, I learned several lessons I wish someone had shared with me early in my career.
Schools, churches, call centers, fitness facilities, and similar users can successfully occupy large retail or office spaces. However, they often require a disproportionate amount of parking, and each parking space may be occupied much longer than that of a typical retail customer.
The large vacancy may be filled, but the remaining tenants can suffer from reduced parking availability. At renewal time, some may choose to relocate because their customers can no longer conveniently access their businesses.
A lengthy lease with a specialized user may appear attractive today, but it can reduce future redevelopment options, limit tenant mix, and make repositioning the property more difficult if market conditions change.
Financial strength, business stability, compatibility with neighboring tenants, customer traffic patterns, parking demand, and the property’s long-term objectives should all be considered before signing the lease.
Sometimes the tenant who occupies the most space contributes the least to the long-term value of the property.
Before signing your next large tenant agreement, ask yourself: “Will this tenant strengthen the entire property—or simply fill a vacancy?”
Have you ever leased space to a tenant who seemed like the perfect solution, only to discover later that they created unexpected challenges?
One of the most common comments I have heard from commercial property owners and investors over the years is: “If we had only known…”
When considering the purchase of an investment property, most of us inspect the building, review leases, analyze income and expenses, and study comparable sales. Those are all important steps. But have we looked beyond the obvious?
What roadway improvements have already been approved? What new developments are planned nearby? What is happening with adjacent properties? Are property tax changes being considered? Could zoning be revised? Are floodplain maps scheduled to change? Will utilities be extended into the area? Are soil conditions suitable for future development?
Notice the recurring words: planned and pending.
Many of the most significant factors affecting a property’s future value are already in motion long before any construction equipment arrives. Government approvals, engineering studies, zoning applications, and infrastructure planning can precede visible activity by months—or even years. By the time the first bulldozer appears, much of the opportunity may already have been recognized by others.
Successful commercial real estate investing isn’t just about understanding what a property is today. It’s about understanding what it is becoming.
Before your next acquisition, ask yourself: “What do the public records already know that I don’t?” That single question may save you from an expensive mistake—or lead you to discover other extraordinary opportunities.
What planned or pending change has had the greatest impact on the value of a property you’ve owned, purchased, or advised on?