What are the downsides of offering a long-term commercial property lease?

By Greg Bell

So you've made it through the often long and complex process of purchasing commercial property – well done! Give yourself a pat on the back because this is no easy road to navigate. With higher risks and a higher sensitivity to evolving economic conditions, commercial property investments take significant thought, time and consideration to properly manage.

If you're now debating whether to offer a short- or long-term property lease, this means you'll soon be ready to get tenants in the door. But with that comes a list of decisions that need to be made in order to ensure you're offering, and entering into, a lease that works for both the tenant and for you.

Long-term is the answer right?
The common belief is that a long-term property lease is the safest way for investors to go. Reasons for this include financial stability over a longer period of time, typically for five years or more, and a higher likelihood of earning a solid return on a commercial property investment.

However, here are a few more questions for you, as a commercial property investor, to consider and ask when offering a lease to a new tenant:

  • Will a new business be interested in committing to a long-term physical location?
  • Is the space I'm leasing flexible and able to be used by multiple kinds of businesses and industries?
  • Are there other types of leases that could provide more benefits than a long-term agreement?

The answers to these questions may surprise you. 

Flexible work models = flexible leases
We know that the Australian workforce is rapidly evolving, and physical office spaces are advancing in response. Looking beyond office spaces, the overall commercial real estate market is undergoing significant change, and flexibility in many areas may be the key to staying ahead.

The 2019 Commercial Real Estate Outlook from Deloitte pointed out that "new business models and competition, extensive use of technology and changing tenant and investor expectations are redefining the commercial real estate industry."

More importantly, the report also noted that mixed-use properties – and those "with flexible leases and spaces" – would begin to attract greater investment attention in the near future throughout the Australian market. With that being said, let's have another look at the questions we highlighted in the first section of this piece.

  • Will a new business be interested in a long-term property lease?: These days, it's becoming more and more unlikely for a company to have a "permanent physical business location" at the top of its investment list. Why? The advancement and versatility of technology means that the majority of businesses can fully operate online, as Deloitte noted. Permanent business locations are now viewed today as too permanent – and too much of a commitment in a quickly changing world.
  • Is the space I'm leasing flexible?: Have a look at the layout, location and potential of the commercial space you are leasing. Is the space open and easily configured to many different kinds of businesses, services, and industries? If so, short-term or flexible leases may not only increase tenancy demand now but also end up working out better for you in the long run than a long-term lease.
  • Are there other leases that could provide more benefits than a long-term agreement?: Start thinking flexibly – not just in terms of offering more short-term options, but in all areas of the terms and conditions of your leases. With businesses operating more fluidly, how can your T's and C's become more versatile so that fluidity is also advantageous to your bottom-line goals?

Are you ready to start leasing a new commercial property? Contact one of the mortgage brokers at Ray White Surfers Paradise today to learn more.

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