How commercial landlords undervalue their property and what you can do about it
How do you set the rent for your commercial property? Do you base it on what neighbouring landlords are asking? What tenants are offering? What you need to earn month-to-month?
There’s a fine balance between charging too much and charging too little for your commercial property, especially in smaller provincial towns where tenants may be harder to come by but your building costs – maintenance, loan servicing, rates – remain high.
So how can you know if you’ve got that balance right? Regan Johns from CBRE Southland has been working in commercial property valuation for 20 years and has seen it all. Now, he wants to help commercial landlords understand the risks of getting it wrong when setting rent, and the best way to make sure you get it right.
The low-rent trap
In smaller towns, landlords can be fearful of increasing their rent too much and being left vacant. However, this only contributes to the issue as lower rents give the landlord little incentive to improve the space, making it harder to attract higher-paying tenants.
In addition to this, casual lease arrangements can mean landlords are wearing costs they hadn’t planned for – rates, insurance, loan servicing and maintenance, for example. This means they’re losing potential income, have an asset that’s under-rented, and an investment that’s under-delivering on its potential. “If you’re only thinking about generic income per week and not the cost or value of the building, you’re doing yourself a disservice,” explains Regan. “Landlords need to consider the value of their fit-out, including the added value of onsite car parks or loading areas.”
The evolution of provincial towns
Provincial New Zealand towns often share a similar set of commercial premises: your traditional retail strip down the main street, a former post office or two-storey bank building, an old paper mill or freezing works now converted to warehousing or residences.
In the past twenty years, we’ve seen massive changes to the retail landscape of these small towns, thanks primarily to new technology. Banks and post offices have prioritised online experiences and centralisation, leaving less staff on the ground; department stores and local boutiques have closed or gone online in the face of stiff competition.
There will always be certain businesses that are necessary: hairdressers and gyms, for example, but for many landlords, the question now is how can they adapt to changing business needs.
“Generally, we’re seeing rental rates remain pretty flat outside the main centres, leaving it up to landlords to incentivise their tenants through better fit-outs or unique offerings,” explains Regan. “Perhaps that’s earthquake strengthening, or adding better access for couriers and the like if your ideal tenant is an online retailer.”
But before you go spending hard money on upgrades, you need to make sure you’re doing it right to ensure you’ll see a return on your investment. “It’s about being smart with how attractive your space is. Is it warm, has it got display frontage, is it secure, is the amenity area modern or is it still the original 1940s kitchenette with a separate outhouse? What will provide the best return on your money? These are all things that we take into consideration when providing a valuation on a commercial property.”
How to calculate the right rent
In these smaller towns, there’s limited information about average rental rates because there’s not a large supply of premises for comparison.
This is where a valuer comes in. Whether you’re creating a new lease agreement or planning renovations, a valuer can inspect the property and survey neighbouring or similar towns to find appropriate comparisons. Because our CBRE team has offices nationwide, we have access to a broader level of information to pull together and analyse to create accurate and informed valuations.
A valuation takes into account the local market, relevant comparisons, the actual value of your property and any renovations. We’ll offer a recommendation of a rental range, and sit down to discuss what steps you may want to take to incentivise tenants and create a better landlord-tenant relationship.
We’ll talk through the pros and cons of doing renovations and what that means: where’s the real value-add, or what alternatives exist? Before you commit to pulling or drilling a single screw, we’ll provide an independent overview of your current and likely future value to ensure you’re making the right moves.
Rental rates for retail spaces vary significantly depending on the location, scale, and quality of the fit-out. Earthquake strengthening, especially in the south, can add a significant amount of value and will become even more critical in the coming years as the deadline for seismic strengthening approaches.
Your local team on the ground
The perfect time to get started on a rental valuation is when your tenancy is approaching expiry or you have a rent review coming up. We’ll look at where your rental sits in the market, what kind of improvements could enhance your marketability, or whether you’re better off maintaining the space as-is.
We’ve got our finger on the pulse of the market across New Zealand, come talk to us today.