Empty retail properties often see landlords criticised by the market and local communities for asking too much rent, however there are other complex and interacting factors.
While some landlords do have unrealistic rent expectations, other factors that lead to properties sitting vacant for extended periods include local market conditions, the pressure of online retail, state and local governments, the lengthy process of required due diligence, and also unrealistic tenants.
Speaking to Pine Property on the condition of anonymity, an asset manager for a non-institutional private client with a national representation in retail and commercial property emphasised the importance of factoring these underlying variables.
Reading the market:
“Landlords have to understand where the market is going. It is not like it was 20 years ago. There is no question it is much harder for retailers,” the asset manager said.
He added that sometimes, both landlords and tenants don’t read the market, often to their detriment.
“If you don’t move fast enough the landlord can lose a tenant, or the tenant can lose a property.”
“You must act quickly and to do that you need to be getting info from a good agent and do your own research so have the evidence and market intel to move quickly,” he said.
A property’s location has a huge impact on whether a tenant believe they can operate a business successfully from it, according to founder and director of Pine Property, Patrick Kelleher.
“Some properties are really appealing and never sit vacant, like high profile corner positions, while other shops down the road with limited natural light or foot traffic are always going to have challenges,” Patrick said.
State and local governments also impact commercial property vacancies, in a variety of ways.
Councils are partly responsible for marketing a region or area to attract shoppers. They must also consider the tenancy mix when reviewing development applications that are often required by many businesses before they can enter a market, further slowing things down.
“You can’t always blame councils for delays either, as the tenant might not have provided the necessary elements required in the application,” according to the asset manager.
He recommends that tenants seek professional assistance for any council applications so as to make the process smoother and expedite approvals.
Another government factor is the recent significant increases in state land taxes and council rates which have affected landlords’ ability to compromise on rent, according to the asset manager.
“Until we see state government help, landlords will have trouble decreasing their rents. Everyone needs to join the party to make it work,” he said.
Due diligence and the tenancy mix:
Part of the application process includes due diligence, which can be complex and lengthy, further contributing to extended periods of vacancies..
“The tenant is going to spend a lot of money fitting out the space, so from their point of view they need to do their homework. Landlords must also evaluate the tenant – their assets, experience, and business knowledge – to ensure the tenancy is not bound to fail in six months,” the asset manager said.
Patrick added: “The lead times in securing an appropriate tenant are usually one to three months but market conditions can easily see that become six or more.”
Innovation is required:
While landlords are often criticised for charging too much rent, the asset manager said the responsibility also resides with the tenant to do better.
“Retailers must be more innovative and smarter than they ever were. They must be switched on when they enter a tenancy agreement, and throughout it, or they will be handing back the keys.”
Omnichannel retailing, technology, and alternative business solutions such as short term leases and pop-up shops are all important considerations.
“Pop-ups are a suck-it-and-see solution for both owners and tenants. It gives both sides the opportunity to see if the agreement will work for them long term,” the asset manager said.
Property is contagious:
Both empty properties and busy strips are contagious. Prospective tenants are less attracted to empty shops and more attracted to bustling strips.
“It often takes the filling of one retail shop by a strong tenant to lift that strip back to a position where other tenants come along and join them,” the asset manager said, adding this furthered the case for landlords to offer short term leasing.
Landlord’s are running a business too:
A property’s value is directly attributed to its market rent thus any decrease in rent will result in a corresponding decrease in the value of the property (Tenanted Investment Analysis), according to Patrick.
“Any astute Landlord conscious of maintaining a level of liquidity with their assets are often less likely to drop rent because it negatively affects the valuation of their property,” he said.
He added that some landlords may accept a below-market rent simply to fill a property, however given the negative impact this has on property values, and the long-term nature of commercial leases, many are reluctant. Some enduring vacancies for extended periods with a stand-off between requested and perceived market rents.
“After all, landlords are running a business too,” he said.
Filling empty retail spaces will ultimately take landlords, tenants and governments being flexible and working together to drive innovation and reach a mutually beneficial arrangement.