How to Choose the Right CRE Tenant for Your Commercial Property
For a commercial real estate investor, it is a priority to ensure a facility is filled to capacity. Vacancies lead to loss of potential capital. During a season of high vacancies, it could even be tempting to offer concessions in order to fill the available space. But the relationship between the CRE tenant and the commercial property owner is a two-way street. CRE owners should be careful about the tenants they choose for their spaces.
While tenants look for a facility with security, amenities, and maintenance offerings, CRE owners should also have a few requirements for their tenants to meet. Commercial landlords need to vet their tenant candidates to make sure they are the right fit for their space. These few, key factors will help guide a commercial property owner through the process of choosing the right CRE tenant for their facility.
Market Research
Before choosing a tenant, a CRE owner should have a grasp of the scope of his or her market. Since every market ranges in size, economy, and availability, there are a lot of factors to consider. For example, at the end of 2018, Boston had a 12.8% vacancy rate. Its Class A office properties had an average rent of roughly $63 per square foot. Meanwhile, the Dallas-Fort Worth office market ended the final quarter of 2018 with an average rent rate of $30.41 per square foot. This area also experienced a 15.2% vacancy rate. The average leasing rate per square foot varies from one city to another. An investor who knows the rent rate for their area can set the correct rate, attract the appropriate candidates, and maintain a competitive advantage. (Property owners can learn about these and other market details by speaking to professional CRE brokers, like the advisors with HBRE.)
Tenant History and Future Goals
As with any lease, the owners of a commercial property will want to ensure their tenants will pay their rent in full and on time. Property owners should check the prospective tenants’ financial records. How long has the company been in business? Does it have a steady cash flow? What is the volatility of their industry? These questions will indicate the tenant’s ability to fulfill their lease terms.
CRE owners should also ask potential tenants to provide a business plan. The tenant’s long-term vision can help the property owner plan for future renovation requests. The tenant’s goals can also offer insight into their growth and plans for future lease renewals.
Consider the Requirements of Each Tenant
Some tenants will require a substantial amount of changes to the physical CRE structure. The number of changes necessary to a CRE property can also vary by property type. Retail properties generally require the most changes between tenants. For example, if a restaurant moves out of the space, and a medical clinic is moving in, there will be a substantial amount of necessary renovations. As investors learn what each potential tenant requires, they can determine whether they can accommodate the tenants’ requests with their commercial property.
Property Management of Commercial Property
Many CRE investors choose to hire a property manager to assist with the daily administrative details associated with having commercial tenants. This could be an individual or a firm responsible for handling leases, collecting rent, or overseeing maintenance needs for the property. Property managers are the link between the landlord and tenants to ensure that both parties are sustaining their portion of the agreement. They will also be able to weigh in on necessary changes when the time comes for the tenant to renew their lease.
The right tenant can become an important, long-term relationship for a property investor. The longer a tenant remains in place, the better the investor’s cash flow will be. That’s why it is so important to review prospective tenants and choose the right one for each CRE property.
If you are interested in learning more about investing in commercial real estate, or if you have questions about buying, selling, or leasing a commercial property, please contact an HBRE advisor. Our team of experienced CRE professionals have the skills and insight to assist with all property transactions. To reach out to us directly, email [email protected] or call 615-564-4133.
