When you work on retail property as an agent, you will soon see the need to specialise locally. There is a lot of difference in property performance when you compare retail property to office property and industrial property. The factors that drive rental, lease enquiry, and property performance are totally different.
If you choose to be a retail leasing specialist, it pays to have a comprehensive knowledge of the factors that drive retail property sales, and retail property performance. All of these factors are linked and impact the activities of the tenants, the tenancy mix, the landlord, and the property manager.
Retail leasing strategies today will vary from property type to property type and location to location. They are however underpinned by local market awareness. To help you with the local market awareness here are some tips and ideas that you can merge into your business activities.
- Get to know all of the franchise groups that are located in your region or those that could be located in your region. Franchise groups are greatly involved with retail property leasing and property performance. They bring a brand to the property that can have significant benefit to the overall tenancy mix. That being said, they have a specific need when it comes to finding the right property and occupying that property. In many cases they will bring a specific lease to the landlord as part of the lease negotiation. In those circumstances, it pays for the landlord to have an experienced property solicitor to help them with the adjustment of the franchise lease document to make it relative to the subject property.
- The competing retail properties in your local area will always have factors of change. That will include expansion, contraction, renovation, and refurbishment. All of these things can shift the tenancy mix and drive tenants to other locations. That will have impact on your particular subject property. As a specialist in the area, keep on top of the changes to the local area in both demographics and property availability.
- Most shopping centres will have one or more anchor tenants as part of the tenancy mix. Anchor tenants are very special when it comes to the future of the property and the attraction of specialty tenants to the shopping centre. On that basis, it pays to connect with the relevant and successful anchor tenants that could occupy medium to large retail properties. Anchor tenants may be department stores, supermarkets, or hardware stores. Given the size of the tenancy that they would occupy, the rental terms and conditions will be significantly different in circumstances to those that are offered to the smaller specialty tenants. In exchange for these differences, you would normally negotiate an extensive and comprehensive lease with the anchor tenant over a long lease term. That being said, the anchor tenant must be the tenant that you require to match the needs of the local shopping demographics and the tenancy mix.
- When it comes to retail property, there will always be alternatives of rental, lease terms, and occupancy conditions. They will include rental levels, rental types, fitout controls, refurbishment strategies, relocation strategies, and landlord investment requirements. Get to know the activities of all competing properties so you can bring that information into those retail properties owned by your clients.
A property person that specializes in retail leasing will be in regular contact with the local business community. It is this business community that provides the specialty tenants for your properties. As part of that process, you should also be contacting tenants in other competing properties in case they need to change location or expand their particular business.
When it comes to leasing commercial or retail property, the landlords that we work for can be too fixated on the start rent as part of the lease agreement and lease negotiation. If they are holding the property for a number of years, there are some other factors in the lease that are perhaps much more important to the lease cash flow.
The start rent of a lease is only of great concern if the property is soon to be re-valued for finance or to be taken to sale in the near future. In that case the passing rent will be capitalised and a value for the property will be set.
The fact of the matter is that the landlord wants a tenant first and foremost. In this tougher property market the landlord cannot be too focused on the start rent (within reason). As long as they get a rent that is relative to market and not aggressively high, they can pick up the growth in rental through other means over the lease term. That’s where you being a lease specialist will be of great relevance to the client. You should be the strategist to make this happen.
Here are some ideas to help with helping the landlords that you act for, get more rent.
- The start rent should be set with reference to the local market and the comparable properties that are available for occupancy. You have to attract a tenant, so the rent has to be ‘attractive’ to encourage property inspections and lease offers.
- Rent review profiles can improve the rent. Importantly you should select the rent reviews that give the landlord a realistic and sustainable rental increase. There is no point in pushing a tenant to business volatility with a high rent. When the property market is soft, tenant stability is more important than rental increase.
- Face rent and effective rent are two different things. The difference between them will be created by the use of an incentive in the lease deal. The face rent will allow the landlord to get back the cost of the incentive. The recovery should be structured into the lease rental and the rent review process. You can calculate the difference between the rentals by a calculation and an assumption of Net Present Value over the lease term.
- Car parking can be considered a separate rental. I know that some lease deals include the car parking in the base lease rent; whilst that is fine for some landlords, do not overlook the advantage of setting a rent on the car parks that are provided to the tenant. Any car parking rental could be documented on a licence or similar separate document to the lease.
- Naming rights and signage in or on a property should not be provided ‘free’. If the business wants to put their business name on a property, consider the issue of rental for that signage being positioned.
- Storage rental should be charged when possible. On-site storage for a tenant is a business advantage. If you give the tenant a special area where they can store things, determine a rental for that and set up a separate licence agreement.
- The provision of roof top space for an antenna will be another opportunity for a rental. You can add to that rental a cabling space rental for the distance that the tenant takes in dropping a cable down the building riser to their tenancy.
I know that some of you may find some of these things difficult to negotiate in all leases; I also know that some lease deals are special and a base rental ‘covers everything’. That being said, please understand that it is the job of the leasing agent to get the best ‘realistic rent’ for the landlord that helps them improve rent and also stabilise occupancy for the long term. You are the lease strategist.
When you manage a commercial or retail property, the budgetary process and assessment will be a frequent part of the property performance and monitoring system. An accurate property budget will help you with the overall property performance throughout the year. That being said, the budget that is created for a property needs to be completely accurate and relevant to the local property market.
Here are some tips that can be applied to the compilation of a budget in commercial or retail property management.
- Meet with the landlord of the property before you do anything else. Understand the intentions of the landlord that can have an impact on the property performance. It could be that the landlord intends to sell the property inside the next 12 months. That single factor will have major impact on the compilation of the property budget. Income and expenditure would be handled differently if the property is to be sold verses retained.
- It goes without saying that you should understand the existing tenancy mix and the intentions of the tenants within the property. Meeting with all tenants regularly will help you stay on top of these issues. If a lease is to expire or renew, the cash flow for the property income will need to show those changes.
- Most property budgets are initially prepared on a spreadsheet with due regard to the timing of changes in income and expenditure throughout the year. This then says that the spreadsheet will reflect the monthly changes of property income and property expenditure. You will need to understand the rental escalations, rent reviews, and options as they apply to each lease within the property.
- A good property budget will allow for vacancies to occur in keeping with the prevailing market conditions. Review the local property market to understand the supply and demand of future space in the particular property type. You will also need to set some expectations and assumptions as they apply to the local and regional economy. Part of that process will include an assessment of the local business demographics and expected changes within the community.
- In preparing for a property management budget, look at all the competing properties in the region or general location. Those properties are likely to place pressure on existing vacancies, and prevailing market rentals. An abundance of vacant space in the local area will directly flow through to a reduction in market rental overall, and potentially a similar case in your property.
- The financial history for the property should be gathered for the last two or three years. That history will allow you to understand rental changes, vacancy factors, and expenditure escalations. That information will help you greatly in creating a new property budget.
- A significant part of the expenditure in any commercial or retail property will include uncontrolled outgoings that have a significant impact on property costs. They will normally be in the categories of municipal rates, energy, and insurance. These three factors take up a large percentage of the building outgoings annually. Estimating the escalations in these categories can be difficult so you will firstly need to refer to the appropriate rating bodies, Energy Supply companies, or relevant insurers for an estimate of expenditure change.
- Talk to other property owners and property managers in the local area to compare property outgoings and expenditure costs. Given that the commercial and retail property market is so specialized, the sharing of this information is very common. Without this information it is very hard to compile the property budget.
A commercial or retail property budget is not a difficult thing to compile, however it does take time and a reasonable amount of preparation work. As mentioned earlier, always take notes regards your assumptions as they apply to the budget. During the year you can refer back to your notes when something seems to be out of balance with the property budget.
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When it comes to managing commercial and retail property, it is very important to optimise the income for the landlord. The income for the property should be looked at both individually with separate leases, and across the entire property and the tenancy mix.
At the beginning of every financial year, there should be some form of budget created for the tenancy mix and the potential property income. All of the leases currently existing will have rental strategies and rental increases to merge into the income budget. This income budget can be incorporated into the business plan for the property for the upcoming year. The best time to do the budget is in the months of April and May, just prior to the beginning of the financial year.
Here are some tips relating to income optimisation in commercial or retail property management:
- Always allow for some measure and method of adjustment given that the property market is always changing in your local area. When you set a property income budget, it should be reviewed on a monthly and quarterly basis. Any established trends in the local area should be tracked and then be used as a form of rental adjustment for the landlord if those trends are firm and established.
- The vacancy factor in your local area will change based on the supply and demand of available property. To monitor this process, you should track down the changes to the property development plan in the region. Look for any new developments that could have an impact on your property. Those new developments will have a timeline of construction and occupancy; it is likely that those developers will also have an allowance for rental incentive to attract tenants into their property. That incentive will have an impact on your property leasing strategies.
- Market rentals will change from time to time. They do not always go upwards, and more commonly will stagnate or slightly reduce when the property market slows. To help you with the levels of market rental, you will need to understand the impact of incentive in the market rental structure as it exists today. If an incentive exists in any market rental negotiation, it creates what is called a face rental. That face rental will be discounted by any property valuer back to a level that is truly aligned to the effective rental and the market. Incentives create a false level of rental.
- Business sentiment will change from time to time based on the local and regional economy. Some business segments and business types will be more active and successful than others. Track those business segments and monitor the needs for property change or occupancy. Some of those tenants could be relocated to your property if the opportunity arises.
- Existing tenants in the property should be categorised into long-term tenants and short-term occupants. Some tenants will be more attractive to the landlord and the performance of the property over time. They may have a tenancy profile or business identity that encourages other tenants to the property. Reviewing the tenancy mix is called tenant retention. You can create a tenant retention plan as part of your business planning model.
- Pressures of expansion and contraction will change from time to time with all other tenants in your tenancy mix. Look for those changes, and keep close to those issues through the business year to identify any pressures of change that may need to be accommodated in the building. It is better to have a tenant in your property that you understand and appreciate, than find a new one that is unproven and costly in occupancy changeover and leasing costs.
The income for a commercial or retail property can be enhanced when you fully understand all of the above factors and adjust the property accordingly. It is not unusual to adjust the business plan or for a property three or four times during the financial year.
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In commercial property management, the process of income improvement is fundamental to the performance of the asset for a property investor. There are many ways the income for a property can be improved; the greater number of tenants in a property, the easier the process is. If you have a single tenant, then your options are limited.
When the property market is slow and tough, the income from the property is more important than ever before. The basic rule is to minimize the vacancies within the property and to optimise the occupancy given the available tenancy space.
Here are some further ideas for property managers to improve property income for the landlord.
- Selecting the right tenants for the property will always be an important factor in the leasing strategy overall and the property management process for the property. In an ideal world, you want tenants that can bring you both stability of occupancy and good business profile. High quality corporate tenants bring an identity to the property that may also attract other tenants to your other vacant tenancies if and when they arise in the same building.
- Rent review terms and conditions are created in and from the initial lease negotiation. To a degree, they will be shaped from the pressures of the particular lease negotiation. The lease negotiation will then be influenced by the prevailing market conditions. All of that being said, the rent review terms and conditions should be suitably shaped to improve the landlords position and rental income. Many agents and property managers choose to use or negotiate a rent review profile for a lease that is indexed to the growth in CPI. In most cases, this process only has benefit to the tenant given that the rent increases in a limited way. It is better to target rent reviews that are established to a more substantial rental increase for the landlord; that can be through a fixed percentage increase, or a fixed amount increase. Market rent reviews are also useful and worth considering, although it does depend on the property, the location, supply and demand of vacant space, and the prevailing market conditions. In the case of a property that is only average in location and presentation, it is better to choose less market rent reviews and more fixed increases. The income from the property is therefore more predictable.
- Options are useful when considering the leasing of a property. It is always wise to remember that lease options will tie the property up for a number of years beyond the initial term. Options for renewal can remove some elements of control from the landlord, and on that basis they should only be used where the landlord feels totally comfortable with the process of giving the tenant an option for a number of years. In older properties that face redundancy this can be an issue.
- Extra rental areas can occur in any building. They may be created for storage, signage, and the use of special areas in the common zone of the building. The extra rentals may be established on separate licence documentation.
- Vacant space optimisation should always be considered. A creative property manager or leasing manager will look at the variations of occupancy and how vacant space can be fully leased at a top rental. Other tenants in the property may be candidates for taking up vacant space if they need to expand.
- Tenant retention plans will help you keep the right tenants within the property. You will also help you identify those tenants that should be moved on at the end of lease occupancy and expiry.
A commercial or retail property today requires creative thinking when it comes to income optimisation. There is a fine balance between charging too much rental and charging the right rental. If the balance is not achieved, you can finish up with excessive vacancies within the property and a lack of potential tenant enquiry. This is where an experienced property manager or leasing manager can provide the knowledge and experience to a landlord. Watch the property market and the properties that you compete with; the tenants that are out there are doing the same thing.
When you manage a retail property there are a lot of things going on that need control and communication back to the landlord. That is where a good reporting system will help you greatly as a centre manager.
It is no secret that the retail property market can be a challenge at the moment with a significant shift between retail sales on the internet, versus retail sales in the shop. It is the retailer that suffers the downturn in trade, and as a consequence they must revisit their product and service offering. If they cannot make a go of it, then a distressed tenant soon turns into a vacant tenancy. The landlord then suffers in loss of income.
Today more than ever before there is a strong bond between tenants, customer, landlord, and property manager. The balance and success of a shopping centre sits in between all of them. They all have a vested interest to make a retail property work and perform as an investment.
Whilst it is nice to have a tenant and a lease for retail shop premises, a vacant tenancy is a waste of time and energy for all concerned. It is in the landlord’s best interest to help a tenant succeed in a retail shopping centre. The link between the two parties is the property manager. A good property manager knows how to help a property thrive and grow as an investment; they also know how to assist a distressed tenant get back on track with sales and customer numbers.
To keep the landlord fully briefed on the performance of a retail property, the monthly reporting system needs to be comprehensive and advanced. Here are some of the big topics to help you structure and provide a monthly report to your landlord client.
- Tenant mix activity should always be tracked. That will include the changes in a property and the upcoming lease activities.
- Lease rent reviews and lease options coming up should be planned and actioned early. Do not leave these things to the last minute. Many a landlord or property manager has been taken by surprise when it comes to a lease document that they did not fully understand.
- Tenant renovation will always be a priority in retail shopping and shopping centres. A shop that looks poorly for any reason will deter customers not just for that particular tenant, but also for those other tenants that are nearby.
- Maintenance in the property will occur for both planned and unexpected events. You must report on maintenance budget activity and results each month.
- Sales by tenant category and by tenant will give the landlord an indication of just what tenants are successful and those that are struggling. Trend these numbers in a graph so you can see what is going on in the property.
- Vacancy marketing will always be important to minimise the impact of loss of rent. Any existing or upcoming vacancy should be comprehensively marketed to attract new tenants to the property.
- Centre marketing to the local community will help with sales for each tenant. There should be a marketing fund for this process. The tenants lease should allow contribution by each tenant to the marketing fund.
- Income and expenditure will be updated each month for the property. In an ideal world the income and expenditure should track closely to budget; that being said, there will always be challenges that need resolve and management.
If you manage larger retail properties, then this list will get larger and deeper. Control will allow you as the property manager to keep the property on track as a retail property investment.
Any commercial property landlord today will have concerns of tenancy mix and occupancy. The landlord will not usually want a vacancy to occur in a property, or suffer a substantial loss of income from a protracted vacancy. So what can you do with this problem? You can establish a tenant retention plan for the property, and it can become part of the annual business plan for the asset.
Tenant retention is simply the process of retaining your good tenants and removing your underperforming tenants from a managed property investment. When done correctly the process can enhance the income for the property and the overall investment for the long term. This then helps the sale of the property if and when it is to occur.
How Do You Get Started?
So how can you set up a tenant retention plan and what are the rules? Over time you can set up your specific plan for your property and landlord, but to get things going here are some tips to build the first tenant plan and start the process.
- Tenant retention is a specific process of a quality commercial or retail property management process. It is necessary that you look at all your tenants in the property today and decide just who the good ones are and who are the ones that you really do not want over the long term. What are your reasons for selecting tenants in either group? You will need some rules to help you choose.
- Respecting the terms and conditions of the existing leases you can manage the poor tenants out of the property at end of their leases; the object being here to offer the space to other existing good tenants in the property, or find new tenants to fill the void. Given that this is a critical process that will impact the income for the property, it should be a factor of consideration each year as you revisit the business plan for the asset and the landlord.
- Set some target market rentals that should be used with new tenants to the property and or existing tenants when they renew their occupancy. Get a property valuer to help with the setting of the right market rental benchmarks. Give due regard to gross and net rentals, plus required incentives to encourage a tenant to take out a new lease.
- Establish a standard lease for the property to control the terms and conditions for the property each time you do a new lease. The standard lease should match the specifications of the property and the investment needs of the landlord. A solicitor should help the landlord with this document.
- Monitor all existing leases that are coming up for rent review or expiry inside of the next two years. As the dates draw nearer, the negotiations can start based on the tenant retention plan and the property decisions already made.
- Check with all your good tenants frequently to ensure that they are happy in occupancy and that they are not under pressure for expansion or contraction. If they are, then you want to be working with them on that as early as possible before another landlord offers them another tenancy space elsewhere.
A tenant retention plan is a good strategy for any landlord or property manager. It sets the scene for a controlled growth of property performance for the landlord.
In commercial and retail real estate, it is common to be asked to do a property management proposal to manage a property that has just been sold or leased. That is usually the best time to secure a new management. The owner of the property at that time is normally quite receptive to discussing property management strategies and services. Most property landlords do not have either the experience or the expertise to manage their property comprehensively. They have not got the latest tools and the systems to correctly manage the cash flow in keeping with the tenant mix and the lease profiles. When you have a number of tenants in the building, the entire management process becomes more complex and time consuming.
Managing a property is not simply just a matter of collecting rent and negotiating leases. There are many strategies and systems to be applied across the property for the long term. In this way the rental and the tenancy mix can be structured or improved. A property management proposal should be prepared with due relevance to the property function and requirements. That says that every proposal should be based on the needs of the client and the challenges of the property. Here are some factors to build into your proposal structure:
- The time involved in managing a property will vary substantially based on the needs of the client and the challenges of the property. When setting a new fee for a new client, it is wise to consider the number of hours required each week to perform the expected tasks of management. When you relate this time factor to your operational costs of the division, you will soon see the breakeven point in the fee structure. Far too many agents simply set a fee based on known cash flow without the regard for expected time input.
- The tenant mix for the property will have both challenges and opportunities. The challenges will be in upcoming vacancies and the repositioning of sitting tenants. That is where lease management becomes really important to the property process. Opportunities will always exist in renegotiating leases with the sitting tenants to improve occupancy and potentially the market rental. Fees should be established in your proposal to cover the renegotiation activities with existing tenants.
- Be quite clear when it comes to the reporting processes to be provided to the landlord. Some landlords can be overly demanding when it comes to the weekly and monthly property reports. If a higher reporting requirement exists, then the fee structure for the property management service should be appropriately set.
It is interesting to note that a quality property management service will only occur if you have good people within your division. That is managers with the experience and the maturity to negotiate leases, optimise income, and manage expenditure activity. Property managers of this type can be hard to find and usually demand a reasonable salary base. That being said, they will always produce better quality work across the portfolio for the clients and the agency principal. To establish and run a professional commercial property management division, you need good people; there are no short cuts.