How To Choose The Right Tenant For Your Commercial Property?

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How To Choose The Right Tenant For Your Commercial Property?
How To Choose The Right Tenant For Your Commercial Property?

Constantly growing rental yield is one of the reasons why most people invest in commercial real estate. Thus, finding the right tenant is of utmost significance for generating long-term returns from your investment. It allows you to enjoy a stable income and benefit from the maintenance of the property by the tenant. Preferably, you must find a business that is already operating successfully and will continue with its winning streak in the future.

Therefore, if you have recently invested in commercial real estate in Australia and are looking for tenants, you must be cautious about finding the most eligible one.It is highly crucial in the current economic conditions and will give you the much-needed peace of mind that your property is in the right hands. So, let us understand how to choose the right tenant for your commercial property.

Understanding the Market Conditions

Before you start negotiations over the rent with the shortlisted candidates for tenancy, you should be aware of the ongoing trends. Due to the COVID-19 pandemic in 2020, the vacancy rates have gone up in Australian CBDs. However, the percentage is still stable because of the lowest recorded rates before the pandemic struck the world. Although Sydney and Melbourne were the worst-hit cities and were under lockdown, they have managed to keep the vacancy rates below 6%. While most of the workforce is working remotely for more than six months now, it has not led to a drastic drop in the vacancy rates.

Thus, you must keep the market condition of your city in mind when deciding the rent. Also, understand whether your commercial property falls in the A-grade or the B-grade segment and the average rental yield in the region. You can calculate the amount after putting together the rent of your space and other expenses and identifying the candidates who can afford this monthly payment.

Thorough Background Research

As the owner of the property, you need to dig deep to find out the financial health of the business applying for tenancy. It is vital to ensure that the tenant will not struggle to pay the rent. Ideally, the rent should be close to 30% of the total monthly revenue of the business to be easily affordable.

So, you will have to assess the total turnover as well as the monthly income. Besides these figures, you will have to look at the financial records of the last two years including the balance sheet, cash flow statement, etc. It will give you a better understanding of the financial viability of the business. If you have received an expression of interest from a start-up, it can work in your favour since they will stay for a long-term.

However, you cannot check any financial records, so you must look into the credit history of the founder and their debts. You may also ask for the bank statement of the entrepreneur to get an idea of his ability to pay the rent. For new franchise units, you must look at the financials of the parent company and the status of other franchisees in the nearby territories.

Recognising the Needs of the Tenant

The tenant will also have certain expectations from the property, such as it should have all the basic amenities and should be well-maintained and clean. It will help you to attract quality and qualified potential tenants for your property when you are leasing for the first time. Also, the tenant will have to get a brand-new fit-out which will suit his business. So, you will have to decide how much changing the interiors should be allowed. As the landlord, you will have to be clear about the type of renovations you want to be done on your property.

For example, if you are leasing the space to an IT company, they will make minimal changes to the current space. On the other hand, if the tenant belongs to the retail industry, there will be significant alterations. You should be ready to accommodate it without getting into a dispute.

Give Precedence to the Location

You must select those business owners as potential candidates who will do well at the location and the premises. There are different types of commercial precincts in a locality which have a cluster of similar businesses. For example, a shopping precinct will have retail shops and restaurants in one place. Similarly, an industrial region will have manufacturing units and warehouses located in proximity.

Thus, you must look for candidates who will fit well in the property owned by you. If you have an office space, consider the neighbouring businesses in the building before preparing a lease agreement. If space is not suited for the type of business you are trying to get as a tenant, do not go ahead with it. The business will fail to pick up in the premises due to lack of target audience and go into losses. It will mean that you will not be able to keep it occupied for the long-term.

Present Your Listing Appropriately

When listing your commercial property for lease on the web, you must offer all the details clearly. It will help you to find genuinely interested candidates who are looking for an office location to run their business. You must provide information about the exact location, space of the complete property along with amenities, rent per month, outgoings, and maintenance. It will help in finding the tenant who will fit perfectly in the premises. Let them know if you are open to negotiations or have flexible lease terms that allow making changes to the terms and conditions according to the changing market conditions.

Also, make lease renewal a part of the lease agreement so that they have the assurance of operating from the same place for long. Most profitable businesses seek stability and need this guarantee from the landlord.

Future Plans of the Tenant

While researching the potential tenants, you must find out about their long-term and short-term goals. Every business intends to scale up so you must understand their requirements when they start expanding. You should assess whether your property will be able to accommodate their future requirements or not. Enquire about the workforce they intend to hire in the coming years and will they need more space. If the expansion plans do not fit into your space, then you should avoid signing a contract since you do not want to look for a new tenant in just two-three years.

Conclusion

Finding the right tenant who pays the rent on time and does not get into any unnecessary disputes is essential for a comfortable lease period. Thus, people who have bought commercial properties for sale in Australia should keep the tips mentioned above in mind to find the right match.

Author Info Sophie Barrett

Sophie Barrett is an experienced real estate marketing professional with a specialisation in commercial property market. She has a Masters degree in marketing from the esteemed Melbourne Business School and has several property management certificates to her credit. Her shrewd marketing policies and business acumen have led to the most rewarding property deals in the major capital cities of Melbourne, Sydney and Perth. She is a popular name in the real estate market and has been serving the industry for almost two decades now. CommercialProperty2Sell is proud to partner with her for some astute discussions and advice on the booming sector.  

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