17 ways to increase commercial property value
Property real estate investors are always looking at the best returns. In this article we cover the top 17 ways to increase commercial property value.
You hear about investors buying a property investment only to find that they continually put their hands in their pockets for additional money for repairs and maintenance—many times, with little growth in investment returns.
We are looking at purchasing a new commercial property; Commercial Real Estate investors, like all other investors, are always looking for a bargain. Something they can add value to improve the return and capital value.
It is more than a coincidence that experienced commercial property investors continue to get higher-than-average returns from their Commercial Real Estate investments.
This may appear simple on the surface, but it involves a lot of experienced property knowledge and research.
Why positioning your property is important
Like any successful business, commercial property investment revolves around increasing income and trimming costs. It’s about identifying the highest and best use for a property and positioning it effectively in the market. The question is, how do they keep on doing it? Are they just lucky? It’s not luck; it’s a careful blend of seasoned property knowledge and research.
I have been in the commercial property industry for over 35 years. During this time, I have had the opportunity to work with successful investors and developers. This includes both prosperous and challenging economic periods. More importantly, I have seen what has worked and what hasn’t.
Whether you’re a seasoned investor seeking to revitalise an existing property or a newcomer eager to explore the world of real estate, this guide will equip you with the tools to thrive. It’s not just about owning property but mastering the art of turning commercial real estate into a prosperous, long-lasting venture.
So, fasten your seatbelts as we embark on a journey to discover how to increase the value of your commercial property investment, one strategic move at a time.”
What is your current property situation?
How do you approach this? It depends on the current situation of the property you are purchasing. Is it run down or in a refurbished condition? If it is tenanted, partially or entirely vacant or a total derelict building or vacant land ready for redevelopment.
The questions that I would ask are as follows;
1. Can the property be redeveloped?
This would depend on the current zoning for the property and the height limit, the floorspace ratio (ratio of the amount of building you can have on the available land).
The problem is when you still have tenants in the building on leases. Even though the property might be suitable for redevelopment, you must consider the current leases. If leases are in place, you can start redevelopment early when the longest tenant vacates the property. This can be many years unless you can work out deals with the existing tenants to leave earlier. This is another cost you must consider when assessing the property’s viability.
Suppose the current investment return on the property is good. In that case, it may be worth waiting till the last tenant leaves by filling in the new vacancies with shorter leases if possible. Another way is to include demolition clauses in new leases. Unfortunately, demolition clauses can be very complex issues, as I will explain later on in this article. They can be a deterrent in getting new tenants at reasonable market prices.
The question now is, if the property cannot be developed now, what are the other options?
2. How can I increase the rent to increase the property yield?
Rent increases are written into the current leases. They are usually CPI (inflation) increases, percentage increases, market radio increases, or a combination of CPI increases and percentages.
For new leases, the rents would depend on the current rents for similar properties in the area and the current market conditions.
You can only increase rent to a market value when written in the lease – usually at the end of the initial lease period or with new leases.
The obvious would be to assume that you can give a new increase automatically.
This is not always the case. In an average, steadily growing economy, it is a good idea to look at all your leases, see if anyone is paying a lower rate than the majority, and increase them to bring everyone to the same. In doing so, there are a few things to consider. The main one is the current state of the economy and the demand and availability of competitive space in the area. If the economy is unfavourable, you may even consider reducing rents, e.g., in times of high unemployment or the recent pandemic.
So ensure you have your ear to the ground and work with a commercial property specialist who understands the market well. Not doing this correctly can lead to tenants leaving and reducing your return.
Analyse existing lease agreements, including CPI increases, percentage increases, or market rate adjustments.
For new leases, research current market conditions and comparable property rents.
3. How can I attract long-term commercial tenants?
Many investors prefer long-term tenants. They don’t have to worry about attracting new tenants and the cost of getting new ones.
Identify strategies to attract and retain tenants for extended lease terms.
Highlight the benefits of stability and cost savings for both parties.
One of the more popular ways is incentives. They range from free rent periods, a reduced rent for a certain period, an offer to enhance the tenancy area/building or a combination of the above.
Thinking about the short-term loss is easy unless you need to sell quickly.
It would be best to look at the long-term higher capital gain view. Look at a future period, e.g. five years. What must you do to get the return as high as possible to ensure the highest cap rate and capital increase?
4. How can I make the commercial leasing area bigger?
Explore ways to increase the leasable space within the property. More space usually equates to more rent, a better return and a higher commercial property value. So why not explore it?
Consider reconfiguring the existing layout to maximise commercial space. Before you do anything, check with your local council to see if there have been any zoning changes since the building was built. I would also speak to a commercial real estate specialist architect with experience with the local council.
Also, you may need to employ a structural engineer to determine if the building is structurally capable of the extra load if planning to expand higher.
5. How Can I Improve the Building’s Overall Appeal for higher commercial property value?
Most tenants feel good about working in nice buildings. They are appealing to the tenants, customers/clients and employees. In most cases, you can charge a higher rent and encourage new tenants to sign longer leases and existing tenants to lease extensions.
Although a fresh coat of paint always helps, you would generally have to do more to stand out from the surrounding buildings in the area.
Enhance the property’s curb appeal to make the property more attractive through landscaping, signage, and exterior upgrades.
Consider interior improvements such as lighting, flooring, and common areas.
Another item to consider is increasing its appeal by giving the building/property a unique name. By doing this, it may add its marketability by appearing more upmarket.
6. How can I update existing commercial tenant amenities?
In our fast-moving world, existing amenities become outdated quickly. New technologies are always coming, which can become a disadvantage and a discouragement in keeping and attracting new tenants. Examples include faster broadband connections, more energy-efficient air conditioning systems, electric car charging systems, security and safer environmental systems. You can safely bet there will be some other new technological requirement soon.
Don’t let yourself get too far behind. If you do, your competitors will update and get the cream of the new higher-paying tenants ahead of you. Always look at ways to modernise amenities. Incorporate eco-friendly features to align with sustainability trends.
Early in my career, I continuously suggested ways to improve our buildings when working for an international property company. When doing this, I was always asked the same question from one of the directors – “does it make us more money?”. If so, it was worth discussing further.
Does this update improve your bottom line? Do a cost-benefit analysis to determine if your investment will increase return to justify your investment.
7. How Can I make my building more secure by enhancing property security systems?
Having the best possible safety and security system is a very high priority for building tenants. There are many things you can do.
Implement robust security measures, such as surveillance cameras and access control systems.
Provide a safe environment with good lighting for tenants and their clients.
8. How Can I ensure my fire systems are up to date on my property?
Fire safety does not seem to get the same mentions as safety. Reducing the risk of fire and having systems on your property to protect your tenants and their customers/clients from fire is essential.
The development approval process includes installing fire systems to the current building code standards. Whilst this is an essential requirement, building owners must keep up to date with the current laws and conditions as they seem to change constantly. This is even more critical in the accommodation industries such as hotels, motels, boarding houses, backpackers, etc.
It is also essential that current systems/ equipment are maintained and certified regularly.
9. How can I retain commercial property tenants longer?
Unless the property is a development site, most owners and future buyers prefer the stability of having long-term tenants. It is easier to get loans, making it most attractive for the regular cash flow.
Develop lease agreements that offer incentives for longer-term commitments.
Offer favourable terms and services to encourage tenant loyalty.
There are various ways of keeping tenants with you longer if they give you notice to leave. Simply talking to them could give you valuable insights in attracting them to stay longer.
The insights may also help you consider upgrades you may not have considered for retiring other tenants and assist you in plans for the property.
Is the space is too small? Consider offering a larger space if it is available. If they complain about the appearance or facilities available, consider upgrades. Do a cost analysis. Would the return on investment be worth your while? Don’t forget to consider the cost of having the space vacant while you are looking for a new one. As the saying goes – “Better the devil you know”.
10. How can I attract higher-paying commercial property tenants?
Upgrade the property to attract tenants willing to pay a premium.
Focus on creating a premium workspace with added value and making your property more attractive compared to the surrounding buildings in quality.
11. How can I minimise operating expenses to improve my commercial property yield?
Good property management and maintenance contracts are essential.
Depending on the cost-benefit situation, Implement smart technology and create an eco-friendly property where possible to optimise resource utilisation.
Reduce energy consumption, maintenance costs, and other operational expenses. Have a policy of continually searching for better and cheaper alternatives with utility, lift, air-conditioning, installing solar panels, fire systems, etc. Ensure that this is done without a reduction in standards.
An excellent example of this is building insurance. Some insurance companies make these very complicated. They are making the job of comparing different quotes difficult.
Some commercial property owners think reducing their cover is an easy money saver. When looking at it on the surface, it is. Be very careful with this practice. For example, an owner may consider reducing their coverage from 100% to 70% with a corresponding reduction in insurance.
The problem is that if you have a claim for, say, a fire to part of your building that needs replacing, you are unlikely to get 100% of the total cost paid. The insurance company (depending on the finer details of the policy) may be only liable to pay you 70% of the total cost, leaving you short.
Most insurance companies love collecting your premiums, but getting refunds can be another thing. I suggest you go through your insurance policies with your insurance broker and property manager to ensure that you are adequately insured.
12. How can I improve the building’s structure?
How you handle this depends on the current condition of the building, the type of tenants you have, the length of the leases and the current zoning.
Building landlords should address structural issues like roof leaks and plumbing problems.
More importantly, the property should be kept in excellent condition to attract buyers or tenants.
If unsure, consider hiring an engineer to confirm that the structure is still sound.
Tenants are more demanding these days. It is a turn-off to infect a possible area to find cracks, water stains, water leaks or any other evidence of poor maintenance.
Many building owners have the attitude of patching up as problems occur.
This may be fine if you have short leases in the building and plans to refurbish or redevelop soon.
Depending on the problem, this can become a costly, unexpected replacement/capital works program.
In my experience of over 35 years in the commercial real estate industry, I have found that the best way to address this is to act as soon as possible to ensure they do not get out of hand and are very costly.
Another reason that is often rarely thought of is if the building owner gets in a situation where they have partnership problems, health issues, new, more profitable opportunities, etc. and need to sell quickly. I have seen this often. Buyers are more astute these days and will always look at the worst scenario and factor this when formulating a purchase price.
13. How can I get the most tax benefits from my commercial property investment?
I am amazed when I have seen property owners not getting the full tax deductions/benefits from their property investment.
It would be best to consider hiring a specialist quantity surveyor to review your building/equipment to ensure your book values are accurate.
Depreciation is an income that affects your bottom line and profitability. Work with your accountant to ensure you get all the tax deductions you are entitled to.
14. How can I avoid property vacancies?
It surprises me how many property owners do not have a long-term policy regarding leases. Many try to get the most extended length of lease possible, which seems evident on the surface. The problem is that you may be in a position to refurbish or redevelop the property and find out that you may have, for example, six leases that have expired and one or two leases that have two or three years to go.
Unless you can work around those tenancies, you can keep these six areas vacant to wait for the building to become entirely vacant when the other leases expire. You may have problems attracting good tenants on a short lease.
Some property owners are encouraged by their lawyers or property managers to include demolition clauses to attract long-term tenants. This may appear to be the obvious action, but it can work against you.
I would suggest that you speak to a commercial property professional with a long history of this experience to develop a business plan for your property.
Why you should have a strategy to minimise property vacancies?
Develop strategies to minimise vacancy periods, such as offering short-term leases if possible.
Plan for tenant turnover and marketing efforts to fill vacancies promptly.
Use demolition clauses with caution. Just inserting them in the commercial lease is not that simple. They require careful negotiation depending on the tenant’s current business conditions. You may have to negotiate compensation for early eviction and/or reduced rent.
Tenants and usually their lawyers assume that the lease is terminated when the demolition clause is enacted.
During economic slowdowns, property vacancies increase. You may have to be a bit more negotiable with your leases.
An example of this was when I was working as a property manager in the property crash of the late 80’s early 90’s. Tenants were few and far between. Whilst many other neighbouring owners were generally non-negotiable on their leases, I encouraged my owners to try to meet the current market rents to retain and attract new tenants on shorter leases.
As other property owners had building vacancies of up to 50%, we managed to keep our occupancy at 90% plus during this challenging period. When things picked up again, most tenants stayed loyal and were more prepared to sign new, longer leases with higher rents. The bonus was that my clients had the cash flow to buy properties at discounted rates, resulting in some amazing capital gains years later.
I cover some of these real-life examples in my book.
15. How can I acquire neighbouring properties?
The longer you hold on to a building, the better the chance is that the opportunity comes up to purchase neighbouring properties. Depending on where the property is, you may be able to get concessions from the local council or state government approval to change the zoning to allow for more building areas or more lucrative uses.
If there are changes in state government policy and your neighbours are reluctant to sell to you, you may think about forming a partnership with them.
Continually keep updated with new property laws, proposed zoning changes and any capital works that can provide opportunities for you.
16. How can I identify other property income sources?
Are there other opportunities to create more income from the building? When considering this, you should consider its effect on the existing building’s appearance and tenants. Identifying new sources of income is another important part of the 17 ways of how to increase commercial property value for the properties owners.
Some of the income sources that I have found for my clients over the years include;
Leasing out advertising space on or above the building. It can be valuable if your building is on a corner, or in a busy traffic location. Both is better.
Mobile telephone towers. Better suited to less congested areas.
Using vacant spaces for movie/TV sets. It can be very lucrative if you have an older building with a unique character.
Pop-up shops. It is even better if you have a vacant retail area during a busy shopping period, e.g. Christmas.
17. How can I implement the best property management system?
Managing commercial property can be very complex. Consider hiring a specialist commercial property manager or property management company.
They can look after everything for you, from day-to-day items new leasing, to property maintenance and possible capital works.
Invest in an efficient property management system to streamline operations and reporting.
Above all, ensure that there is always efficient communication with tenants and quick issue resolution to stop matters from getting out of hand.
Conclusion: commercial property investing is a dynamic and ever-evolving business
In conclusion, owning a commercial property investment is not just a financial endeavour; it’s a dynamic and ever-evolving business.
There are many ways to increase the value of your real estate investment I have covered what I think are the main 17 ways to increase commercial property value.
With over 35 years of experience in the commercial property industry, I’ve witnessed first hand the strategies that consistently yield higher returns and increased property values.
Remember that successful commercial property investors treat their investments as businesses. They combine knowledge, innovation, and a proactive approach to successfully navigate the commercial real estate market. Addressing the critical questions and implementing the strategies discussed in this article can enhance your property’s appeal, boost your cash flow, and reduce costs.
Every decision, from attracting long-term tenants to modernising amenities and minimising expenses, should align with your long-term goals. Moreover, keep a keen eye on growth opportunities, whether acquiring neighbouring properties or exploring additional income sources.
Embrace the challenges to increase your commercial property value
Your commercial property investment journey should be a testament to continuous learning and adaptability. Embrace the challenges and opportunities that come your way, and remember that success in this field is not solely about luck but about informed decisions and strategic actions.
As you embark on or continue your journey as a commercial real estate investor, remember that the path to success is paved with careful planning, diligent execution, and a commitment to treating your investment with the seriousness it deserves. With determination and the right strategies, you can maximise returns, grow your property portfolio, and ultimately become a highly successful commercial real estate investor.
Written by Con Tastzidis
Con is Managing Director of multi award-winning Commercial Real Estate brokerage and consulting company CST Properties since 2001.
With over 35 years of hands-on experience, Con Tastzidis has etched an indelible mark in the hotel, tourism and leisure commercial property and business sectors. Having engaged with national and international hotel and property companies/owners.
Con is the author of several books, including Amazon top-selling book “Real Estate Investing For The Residential Investor-The- The 7 Myths of Commercial Real Estate Explained”. In this book, Con outlines many of the successful outcomes he has achieved in both good and adverse economic conditions for his clients. Con has been featured in several national and international media outlets, including FOX, CBS, NBC, ABC, CNN, and BLOOMBERG.
Con, he can be contacted through this link. Feel free to contact Con Tastzidis at CST Properties.