In our article this week, Buffett calls the end of the retail industry as we know it, we predicted retail leases will get shorter. Maybe even year-to-year leases with the tenant having the right to renew for another year or terminate. If we’re right that’s going to cause some problems for landlords and their brokers.
Lenders view leases with qualified tenants as nearly guaranteed cash flow streams that the borrower can use to repay the loan. Commercial loans vary but it’s safe to say the majority are 5 years or longer. That’s problematic if your leases only extend one year. How will lenders get the security they require?
This is a related problem. Normally, a new development requires a minimum number of tenants sign leases before the financing can be secured and the construction can start. If retailers on average demand short term leases I expect this will limit new retail development. It could be argued this may make the retail real estate market healthier as a whole.
Lease commissions are used to motivate and compensate commercial real estate brokers. Normally, a commission is paid as a percentage of the total rent that will be received by the landlord over the term of the lease. If the term is only one year the numbers won’t work for the broker. Expect to see this calculation change. It will probably become a flat $/SF at lease signature with no compensation for renewal periods. But of course it will vary by property and each deal is a little different. The key is keeping the motivations of the broker and the landlord fully aligned.
About Beau Beach, CCIM
Beau is a leading Investment Real Estate Broker, Forbes Magazine contributor, author, investor and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau leads Prowess Investment Real Estate Services which specializes in selling investment real estate for the absolute highest price the market will pay in Wisconsin, Florida and Illinois.
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Beau can be reached at 414-324-4938, 561-425-9935 or Beau@ProwessIRES.com