Vacancy. It’s a small word but one with enough power to strike fear in the heart of a savvy commercial property investor. Vacancies in commercial property come with higher risks than in residential as most commercial properties are suitable for specific types or sizes of businesses. That means they attract far fewer potential tenants than your standard residential property does.

Not only is it harder to fill a commercial vacancy, but the value of commercial properties are inextricably tied up with the value of their leases.

A vacancy, particularly during a weak leasing market, has the potential to hurt the value of an investment. So we spoke to some commercial property investment experts to get the low-down on how to address, or better yet, avoid, vacancies.

Forewarned Is Forearmed

Jeff Brill is the author of The Sophisticated Investor, New Zealand’s only recent book on commercial property investment. In his view, a landlord should know well in advance that the tenant is wanting to leave and if they find out with just three months’ notice, the odds are the property hasn’t been well managed.

Rent reviews give landlords a good idea about the tenants’ intentions, he says. “An effective landlord, or management company, will find out what the tenant wants and be able to deliver it with a corresponding higher rent or not.

“If not, there is a good chance that the tenant will leave at the next renewal which should give the landlord at least a one-year heads up that the tenant is looking around."

So establish tenant intentions early on in order to have plenty of time to advertise and find a new tenant.” Brill says a six-month lead time is ideal for a larger tenant and that to attract tenants it pays to provide sector and area specific details. For example, with a retail property that might mean a full list of local amenities, a traffic count and the names of any big tenants nearby, as they pull in customers.

Communicate & Offer Incentives

For many veteran property investors addressing vacancies, or the threat of a vacancy, all comes down to communication, negotiation, and offering (sometimes creative) incentives. Prominent Auckland investor David Whitburn says it is critical to communicate with tenants, look at the market, and talk to skilled leasing agents in the area to get market intelligence. “If necessary to keep or get a tenant, offer an incentive, like a couple of months’ rent free or paying for a tenants’ fit-out cost - if they sign a longer term lease.

“This is an easier process if maintenance is kept up and done effectively. Tenants who are left with a lift not working, no hot water, poor airconditioning and so on are more likely to move on when their lease is up. You want to demonstrate professionalism.”

For Hamilton-based investor and agent Vaughan Heslop, it’s necessary to deal with vacancies on a case by case basis and figure out what the impediment to getting a tenant in is. “Get feedback, find out what potential tenants’ objections to the property are and then address them appropriately,” he says.

“This sounds straightforward and sometimes it is. In reality, often you identify a problem and it’s difficult to remedy. For example, you might have a retail property which has an entrance that is pokey and not inviting to customers. To address it you could redo the storefront, which can be very costly and involves consents. But it would pay off to do it.”

To be successful, a commercial investor needs to be genuinely tenant led, Heslop adds. “So you have to make allowances for such situations and act on them appropriately.”

Practical Actions

There are also some very practical moves a commercial landlord can make to tackle a vacancy. Colliers’ national director of commercial leasing, Rob Bird, says one of these is ensuring a property is presented well. That involves upgrading entrances and lobbies; removing old or redundant fitout that is not of use and does not present well; and reworking or improving a property’s amenities.

Another option could be creating smaller suites in a property, if it’s possible. “Consider splitting a floor into 200 – 300m2 suites that have quality base fitout. They lease well, have a short lead time, and they also serve to lift the standard within the building. Think about co-working spaces too: there’s growing demand for it.” Investors should also ensure they present rents, terms and incentives which meet the market and ensure they provide timely responses to potential tenants, Bird adds. “Finally, never overlook the power of good marketing content and messages when trying to lease a property.”