Congratulations, landlords! A vacant industrial property or a tenant whose lease is up for renewal is a terrific opportunity right now! In our March newsletter, we discussed national Lease Spread trends. Sign up for our newsletter here.
Industrial lease rates have been increasing nationally, and as tenant leases roll over landlords are benefitting. Landlords locally and nationally, in most cases, are able to raise rents above the expiring lease rates. Industrial vacancy rates which can be as low as 1% in some markets are continuing this trend. This is a terrible situation for tenants… and a great situation for landlords. We know there are other issues landlords are facing such as significantly higher capital improvement costs, raising interest rates, and likely a more difficult lending environment when it debt refinancing is due. A few of the strategies we use with our land clients are below:
Industrial vacancy rates which can be as low as 1% in some markets are continuing this trend. This is a terrible situation for tenants… and a great situation for landlords. We know there are other issues landlords are facing such as significantly higher capital improvement costs, raising interest rates, and likely a more difficult lending environment when it debt refinancing is due. A few of the strategies we use with our land clients are below:
1. Employ a Broker! Undoubtedly, a landlord who is raising rent on current tenants is likely to loose a few tenants along the way. A good broker will bring the landlord tenants early which will typically lead to more successful renewals at a higher lease rate.
2. Options: Beware of them. Landlord’s should remember that o ptions are in the tenant’s favor. Many landlords agreed to a simple option a few years ago. Nobody expected annual CPI increases of 8.5% and 7.5% at the time. Depending on the option terms these landlords may be loosing ground due to higher repair costs and significantly higher financing costs. There are situations where granting an option makes sense, such as when the tenant invested a significant amount of TI funds or under other conditions, but in general, options are not in the landlord’s best interests. By the way, a few minor adjustments to the option language can remove much of the downside for the landlord
3. Lease term. Many landlords we work with have benefited over the past few years with short term leases . These landlords have been able to continue to raise rents as the market lease rate has increased. Banks and appraisers, however, typically prefer long-term leasing agreements because they provide stability. Before approving new lease terms, a strategy should be developed. Is a refinance on the horizon? Does the landlord have significant concerns about the economy going forward? These are just a few of the factors that should be considered when deciding on the lease term strategy.
4. Tenant Improvement Allowance. The landlord share of Costs for TI ought to be lower than in prior years. Landlords can capitalize on this market and continue to invest in their properties by switching to LED lighting, painting, and, as needed, replacing flooring and ceiling tiles. Nonetheless, the majority of tenant-specific upgrades or general office expansions ought to be paid for by the tenant.
5. Plan for the future. Net income ought to be at an all-time high. It is a great time to plan your strategy for the next few years. This may include funding capital repairs or replacements with the additional cash flow. If debt refinancing is coming up it may be a good time to start discussions with your lender. Or if the plan is to cash out or find another project the increased NOI will increase your building value . Even in the face of rising interest and cap rates the higher NOI should aid in raising values.
Please contact Mark@Summit-CRE.com or 262-370-9852 if you’re interested in learning more.