Someone mentioned that for accounting reasons property portfolios may be better sitting empty than offering tenants a discount because their yields look bad?
In: Economics
Commercial leases are typically *much* longer than residential. Most residential contracts are for a year at most. Commercial leases typically *start* at five years and can be as long as 20 or 30 year leases. Even short-term leases of less than one year are typically part of a contract where the tenant is expected to be renewing every year for the next 30 years.
Given how much effort goes into commercial leases and how money there is riding on the lease, it’s better to let the property sit empty and lose a little money than to get locked into an unfavorable contract for a decade or more.
I think the other comments are overstating the value of the real estate. Yes, commercial real estate is very valuable but it’s valuable *because you can charge rent*. Cities don’t appreciate it when companies let valuable commercial property sit empty, because it’s bad for the businesses around it – to say nothing of those businesses. If it’s something like a shopping center, one location sitting empty will drag down the value of the rest of the property and the rent that they can charge. While it’s true that they might be able to afford to sit on the property and let it accrue value simply by existing, nobody wants to let money go for no reason. If they can get a lease, they will.
They aren’t worried about tenants being a headache because that’s literally their business. Nor are they worried that giving one discount will suddenly cause everyone else to demand discounts. Again, commercial leases are *long*. The bay next to you getting a slightly lower rent per square foot than you negotiated might piss you off, but you can’t renegotiate for another five or ten years so what are you going to do about it? And then by the time the contract is up for renewal, the whole economy of the country may have dramatically shifted. So, although previous rent agreements will inform the negotiations, it’s not nearly as simple as “Well, you gave that guy $X/sqft, so give me that, too.”
There are also many more things to negotiate for commercial leases like common area maintenance fees, tenant improvement allowances, signing bonuses…The fees are rarely fixed and will increase every year to make up for expected inflation and increased property values; you need to negotiate that rate. Rarely, rent may even be tied to sales, so if you make more, you pay more. There is an entire industry built solely around auditing existing contracts to find money that everyone just kind of forgot about because 15 years ago you agreed that the tenant would pay for common area maintenance but then the tenant forgot to include that and the property management company didn’t notice because an extra $200/month in CAM is absolutely nothing compared to the several million dollars in rent coming in from the entire shopping center and hundreds of millions coming in from every property they’re managing.
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