Commercial Property Leasing Tips

July 27th, 2010 · 1 Comment · Commercial Property, Property Management

I am a big fan of commercial mixed buildings. They tend to be more reasonably priced than duplexes or triplexes yet still affordable for newer investors. These buildings require 30% down and have higher taxes than homes. Lots of investors are scared of the commercial component of these buildings. I wrote an article over at Million Dollar Journey called Residential VS Commercial Real Estate Investing. I feel as though these buildings are more diversified because the include more profitable commercial rentals with the stability and ease of renting of the residential section. Basically you get the best of both worlds.

Vacancy

I have noticed that quite a few of these mixed use buildings are sold with an empty commercial space. This can be good if you have a business and are looking for a permanent space. Sometimes owners live and occupy the suite above the business. No commuting is a bonus in my book. If this is your plan then you already have a tenant for the commercial space. Bonus!

Investors will have to fill the commercial space and that can be difficult if you have no idea what to do. Location matters and if you’re in a high demand area you might not have to do anything to the space. Most landlords assume that this is how to do it and no one will tell you differently (except for me).

Legalities of Renting Commercial

Legally only real estate agents or employees can rent commercial space for you. Property managers on contract are not legally allowed to but they will do it too. You can also rent it yourself. I have heard a lot of complaints from owners about real estate agents doing a so-so job. If you’re going to hire a real estate agent make sure you hire someone who does commercial leasing rather than someone who sells houses.

What you should be prepared for

Commercial spaces take longer to rent. That’s because there are less commercial tenants than residential tenants. I’m not sure why but landlords usually don’t do anything to the space to prepare for renting. Couple this with a tenant locked out or a midnight move and you have a space that is not well presented, dirty and unorganized.

Change of Use

As a landlord you want whatever business that moves into your space to be successful. You want someone to stay as long as possible so you never have to deal with vacancy or kicking someone out because they don’t have the money. You need to use your common sense and figure out if the use planned for the space makes sense. If you can get a franchise that’s a bonus. Entrepreneurs starting a business tend to be very optimistic about their chances of success. You need to be the one who uses their judgement.

Certain business work well together for instance a nail salon and hair dresser. These businesses draw from the local area. If you put two hair salons together you will cut the existing place’s business. The new one won’t do too well either. Look around your area to see what tenant mix works there.

Learn From Failure

Look at the history and find out what has been in the space in the past. Restaurants have a high rate of failure. It also costs a lot of money to outfit a place to be a restaurant. But if you find that a restaurant has been continuously failing in that location for the last 15 years, it’s time to change. I had this problem with a location I managed. It had been vacant for 5 years. It was a pizza store for the last 20 years. It had failed about 4 times. It was the worst location, on a quiet one way side street with no traffic. I showed it for about a month before having a serious talk with the owner about the space and the use and the condition of the place. There was a nasty pizza grease film all over everything. We sold the equipment, painted the place, added a little mezzanine and it rented before the reno was even done.

Blank Space

There is a lot to be said about presenting a commercial rental as a blank space. First of all there are tons of uses for commercial space and you have no idea which kind of tenant you will get. There is a bit of an eerie feel to a property that looks like the business just disappeared. Failure just hangs in the air.  What’s attractive about that?  If you don’t want to change the use, organize and clean out signs of the last tenant. Paint any odd colours over beige or white. Get rid of any left over stuff that is unlikely to be reused. The equivalent would be staging a residential property by removing all the personal pictures, excess furniture and laundry on the floor. Most people have to visualize their space with their stuff in it before they feel good about signing on the dotted line.

Lighting

It’s not unusual for front windows to be blocked off, energy efficient lighting is common. Make sure the space looks bright. I’m not sure why this works but it does.

Think out of the box

One space we had terrible luck with.  It was very large and deep with tons of storage. Frontage was only about 20 feet. We rented it about three times in two years, between free rent and vacancy and showing the place it was constant and the landlord didn’t collect a cent of income. What a nightmare. We changed the use of that place to a business center with six small offices. We put a copier, fax and kitchenette in there and got about twice the rent we were getting before. We also had continuity because although tenants would come and go the entire place wasn’t a loss, we always had multiple tenants who were staying and paying.  Small spaces cost more per square foot so it worked out well.

Incentives

As a commercial landlord you may be expected to make concessions for the initial rent. I have never liked the idea of free rent or giving things away. I don’t mind an exchange such as I’ll give you three months free rent if you prepay the next three months. What you don’t need is some questionable business person taking advantage of your free rent, moving in with only his underwear and trying to be successful on a wish and a prayer. The business needs to be fairly well capitalized or have existing customers to rent a space. It is exceedingly rare for someone to just throw up a sign and be inundated with business. I also have no problems performing leasehold improvements as long as they add value to the space that you get to keep. If a business needs to do something expensive that will be useless to the landlord later on and have to be removed, they can pay for that on their own.

That All For Now Folks !

That is the sum total of my bright ideas for the day. Except this one. If your space isn’t renting, and you’ve implemented these suggestions already, It’s time to check up on your staff. Don’t call from your number! Get a friend to call, make an appointment and see how it goes. You will then find out if that is why your space isn’t renting. Some people don’t return calls, skip appointments or put them so far in the future that the potential tenants can lease 10 spaces before they get to yours. Maybe they send some idiot lackey to show the place. After six months of showing a place they may just be demoralized. I don’t believe in luck as a business strategy. Sure you get lucky sometimes, but most luck rests on a solid foundation of hard work.

Happy Renting!

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