Typical Commercial Lease Lengths and Property Types

Hi

I was trying to figure out if there is any general correlation/observation or unwritten rule in the Commercial Property Lease Market in terms of Lease Lengths and property type/location?

My observation was restricted to Metro Cities (Sydney, Melbourne, Adelaide, Perth) and some regional (towns - e.g. Townsville, Ingham QLD, Rockhampton QLD, East Devonport TAS, Port Pirie (SA))

Type of Property - Smaller Warehouse with Office space (approx 100-250SQM) and Shop Fronts (60-150 sqm). Bulky Goods/Retail office (combo).

Typical rentals - Metro - 24-45K NET. Regionals are approx - 15K- 29K (for the above types of properties).

In almost majority of the Commercial Properties - the lease that is currently in place or in the past tend to be on a 1-3 year tenure and some don't have options to renew. In some instances the options to renew also taper off to 1 year or 2 years.

I am trying to get a sense of the lease Market and draw some conclusions in these entry level type properties. Does one typically see 5 year leases and 5 year options (is this more of an exception than a norm ?). What has been the experience if someone holds such commercial properties. Also keen to hear their thoughts/Risks and other considerations.

Cheers
P

 

Agents can't write a lease for longer than 3 years, they require a solicitor to prepare the documentation (ie agent gets paid to prepare a short lease, solicitor gets paid for longer lease) - is there a bias from the deal-maker?

Smaller industrial properties attract smaller tenants (these may be upsizers from a garage/shared space/subletters etc) - as they're dipping their toe in the water, do they want a 5 year commitment when they are just starting out?

Retail is bound by the retail leases act (in the state) - generally a 5 year lease must be offered but a tenant can respond with a shorter term. Quality and type of tenant varies widely as the use dictates the size of premises unlike industrial eg FMCG and foodies will often occupy 70-150m2 but can attract mum & dad businesses, franchises, listed companies or international companies.

Longer term leases are often considered by established companies where location is important (exposure, goodwill, access etc) - the value of the location is linked to the site eg Medical centre/TAB/Newsagent/Chemist/Vet/Video Store but economical obsolescence (technological change) is playing a greater part in the attractiveness of some of these businesses and their long-term survival.

 

That makes sense and great explanation @Scott No Mates .

Technological Change/Innovation and the economical obsolescence is interesting one and its impact on Shops/Warehouse needs to be understood. Is there going to be structural changes in these Commercial Properties types and the potential risks associated in terms of being leased longer term.

These longer term leases - potentially the tenants can sign a lease for 5+ years and if they go under or bankrupt then it would be another exercise and the longer leases could potentially be at risk again I am guessing.

 

Some usages are cyclical or fads, others just fade away slowly. Banks are pulling out ATMs and closing branches due to reduced demand for cash, real estate agents are moving away from the best/high traffic shopfronts to lesser expensive office or secondary retail space. Suburban hardware stores or office supplies shops have been displaced by category killers.

Will they necessitate physical changes - possibly who 'click and collect' services may require better access to carpark areas or docks.

 

This is what my husband and I had for over 20 years, 12 smaller units which attracted tradies and other small business people whose initial lease was for 6 months. When the property sold 5 years ago we had several tenants who had been there for over 10 years. After the first 2/3 years it took to establish we never had less than 8-9 units that were let and when sold all 12 units were let.
It was a constant cash flow and no worry about 1 large building left empty as some were in the area.

 

In the years that the CIP was held - what would have been the longest vacancy that you may have had to endure.

Is there anything that one can do to reduce the vacancy periods (Things that one can control). Did vacancy period(s) cause reduced rentals and/or costs upfront (contributions if applicable) to get the cashflow flowing again ?

 

Most bulky goods places in Perth tend to be 5+5+5 - some may start with a 7 or even a 10 especially if it's a national corp

Smaller high truss factory units tend to be much shorter and

 

The longest vacancies occurred when first built, we kept the rent reasonable and the initial lease period was 6 months, most tenants stayed longer. Maintenance was cheap, clean toilets, mow some grass and occasionally clean out gutters. We had the added advantage of no mortgage as we paid in full to develop the 2 blocks and as I had a REA licence looked after the running of the property.
The rent was the same for each unit, some tenants had 2 units [the walls were removable] never reduced rent for anyone [tenants talk to each other]