Vacant storefronts and offices can be found in many communities. The restaurant down the street has never received a new tenant. The retail storefront around the corner has been vacant for over a year.
Business owners may assume that pursuing long-vacant real estate means they’ll be able to get a better deal. If a space has been vacant for over a year, won’t the landowner be glad to have rent coming in?
In commercial real estate, landlords must consider a variety of factors before leasing out their property. Just because a space has been vacant for a while doesn’t guarantee that you’ll be able to negotiate cheaper rent or a lower asking price.
Finding The Right Commercial Tenant
Property owners take a risk every time they lease to a tenant. Often, commercial real estate owners are looking for certain types of tenants, who are low-risk and would fit in well with the surrounding businesses.
Finding the right tenant takes time. Many landlords are willing to let a space sit empty as they wait for a suitable tenant to come along.
Type of Business
Commercial real estate owners want to make sure each new tenant could benefit from the existing customer base. Do the people in the neighborhood match the prospective tenant’s target market? Is there a good chance this tenant will be successful based on market data?
Landlords may try to create certain environments for customers, and they may have specific ideas about what types of tenants they need. If the goal is to acquire a mix of retail, residential and business offerings, waiting for a certain type of tenant may mean that a space will be vacant for a while.
Some landlords may not be able to negotiate rent. Large landlords must structure leases based on their shareholders’ return expectations, leaving little room for cutting rent. Many of these firms have lenders with extremely strict loan conditions that require a certain number or type of national tenant to be located in the center.
On the other hand, a landlord may be waiting for a local business with the right business plan and credit to show interest.
Each tenant has different needs. A restaurant and a jewelry store don’t need the same amenities. Changing tenants may require renovations to be made to the building. If the landlord takes on this responsibility, they may be waiting for a tenant who will make minimal renovations to the space.
For example, after Obamacare was passed, numerous small clinics, doctors’ offices and imaging practices were forced to join larger clinics and hospitals who could afford to provide services. This left many spaces that had been finished with a number of small exam rooms and large waiting rooms. Many of these landlords waited for another medical user when none were coming. Instead, they had to invest in tenant infill costs and allowances to attract new tenants.
The average lease length in commercial real estate is anywhere from three to 10 years. Some landlords may not be interested in short term leases. If a tenant signs a one-year lease and doesn’t wish to renew, then the landlord is back where they started searching for another tenant.
Long-term commercial leases are a better investment for real estate owners, especially if the space needs to be renovated for the tenant.
Finding the Right Commercial Real Estate
For tenants, the search for the right real estate is quite similar. Like landlords, tenants are also looking for certain types of properties in terms of location, visibility and amenities.
A shoe store may want a location near a clothing store with an existing customer base. In this example, the shoe store and clothing store could benefit from sharing foot traffic if their target markets are similar.
Tenants may be more inclined to move into a space that previously housed a similar business over finding a contractor and performing renovations, depending on who—the landlord or tenant—is responsible for refurbishing the space.
Other Reasons Why A Space May Be Vacant
There are other reasons why a space may be vacant for a long period of time. The property may not have the level of visibility many tenants want or it may not have adequate parking for certain types of businesses. Zoning laws may also limit how landlords and tenants can use the property.
Waiting for a Buyer
A space may stay vacant if the landlord is waiting to sell the property to a new owner, who perhaps would occupy the space after buying. In this case, the landlord doesn’t want a tenant; they want someone to purchase the building.
Market Value of the Property
If a landlord agrees to accept rents below market levels, he has just depreciated the value of his property and the rents the other tenants are paying.
The value of an investment property is not normally based solely on the typical comparable sales used to value residential properties. It is based on a stream of income and the net operating income the property generates.
Again, if a landlord accepts a below market rent, he has hurt the value of his property. Believe it or not, a vacant space is better than an occupied space paying below market rent.
Long-Vacant Real Estate Doesn’t Equal Better Deals
If a commercial property has been vacant for months or years, the reason may not be what you think! Just because a space has been empty doesn’t mean you’ll automatically get a better deal. The landlord may simply be waiting for the right tenant to make the commitment.
Are you looking for a business space for rent? Ready to make a move or add another location?