Weighted Average Lease Expiry (WALE):

An In-Depth Understanding for Commercial Property Investors

Why does a commercial real estate investor needs to know weighted average lease expiry?

Weighted Average Lease Expiry (WALE) holds significant importance in commercial real estate. But what exactly does this term entail, and when should it warrant your attention? If you’re considering investing in a property with many different leases, it would be worthwhile to look closely at the details of WALE.

What is WALE?

Navigating the complex landscape of market risks in a property with varying lease durations can be daunting. This is where the concept of Weighted Average Lease Expiry comes into play. Essentially, WALE represents the calculated average period until the expiration of all leases within a specific property. This numerical value serves as a tool to evaluate better the current and future income potential derived from the property.

How do you calculate weighted average lease expiry?

Calculating a property’s Weighted Average Lease Expiry (WALE) depends on two main factors: the combined length of all leases linked to the property and the specific agreements with each tenant. This process might seem complicated, but let’s break it down:

Lease Length and Agreements: The WALE is determined by adding up all leases’ total time. These leases can have different lengths depending on the tenants. Each tenant has an arrangement regarding the space they’re renting.

Changing WALE: The WALE can vary based on each lease’s size and income/rental rates. This means that the length of a lease and the money it generates contribute to the overall WALE.

Relation to Property: The size and income from each lease are compared to the entire property. For example, a large rented area with a long lease can balance out the potential risk from smaller spaces with shorter leases.

WALE calculation

In simpler terms, the Weighted Average Lease Expiry is like finding the average time all tenants will stay in a property. For example, you may have four tenancy areas in one property you may be looking at investing in.

The average time in each space is 6, 5, and 7 years for the other two tenancies.

As follows 6 + 5 + 7 + 7 = 25

25 divided by 4 (separate tenancies) = 6.25 Average years per tenant.

This real estate investment would seem better for a conservative investor than another comparable property with, say, four years average years per tenant.

This depends on the lease lengths and rental incomes, and larger, longer leases can help offset the impact of smaller, shorter leases on the property’s overall stability.

What is the  Significance of Diligence in Weighted Average Lease Expiry Analysis:

The implications of WALE are particularly pertinent based on its owner’s intended use of the property. Invariably, investors tend to favour properties boasting longer WALEs. A high WALE over five years signifies a stable tenant base and elevated satisfaction levels. On the contrary, a shorter WALE, spanning just a few years, may hint at a revolving door of tenants, leading to additional expenses associated with managing tenant turnovers. In scenarios where the local rental market experiences a downturn, a shorter-term WALE could potentially underscore the risk of prolonged vacancies in segments of the property. Notably, the market’s perception of two similar properties in proximity can significantly differ based on the disparity in their WALEs, thereby influencing their market prices.

Strategic Nuances: Embracing a Shorter WALE:

However, it’s essential to recognise that a shorter WALE with a shorter lease expiration isn’t inherently unfavourable. Suppose you’re contemplating property enhancements or expansions within the upcoming years. In that case, shorter lease durations can offer an opportunity to effect improvements, renegotiate lease terms, and position the property within a higher rental yield bracket.

The Pinnacle of Appeal: Long WALE and Property Transactions:

In the context of property auctions or private sales of commercial leasing properties, a lengthy WALE undeniably stands as an appealing high-labelling point. As with any investment endeavour, a thorough evaluation of the property’s risk and return profile ahead of your specific objectives remains imperative before reaching a final verdict.

The Weighted Average Lease Expiry is pivotal in commercial real estate investment. By grasping its nuances and implications, investors can wield an informed perspective when evaluating properties, charting the course of their investment journey and finding their highest & best use of the investment.

Practical Scenarios Illuminating the Influence of Weighted Average Lease Expiry (WALE)

To truly grasp the impact of Weighted Average Lease Expiry (WALE) in commercial real estate, let’s explore a couple of practical scenarios that shed light on its far-reaching implications.

Scenario 1: The Power of Stability

Consider Property A with a WALE of seven years and Property B with a WALE of just three years. At first glance, both properties might appear comparable, but a closer examination reveals profound distinctions. Property A boasts a longer average lease term, suggesting a stable tenant base and a greater likelihood of consistent rental income for the foreseeable future. Investors keen on minimising risk would likely find property A more appealing due to the assurance of sustained revenue streams.

In contrast, Property B’s shorter WALE might raise concerns about the potential for frequent tenant turnovers and the associated costs of attracting and accommodating new tenants. This scenario underscores how the WALE can be a reliable gauge for evaluating the stability and resilience of income generation within a property.

Scenario 2: Navigating Market Volatility

Let’s envision two properties situated within the same neighbourhood, Property X and Property Y. Both properties are similar in size, layout, and features, yet they differ markedly in their WALE. Property X boasts a WALE of eight years, while Property Y’s WALE stands at a mere two years.

Property Y’s short WALE might not pose significant concerns in a stable rental market. However, should market conditions experience turbulence and rental demand diminish, Property Y could face a notable risk of vacancies. On the other hand, Property X’s longer WALE acts as a buffer, safeguarding against sudden market fluctuations by offering an extended period of stable income.

Scenario 3: Leveraging WALE for Strategic Upgrades

Imagine a property developer eyeing Property Z, which features a WALE of just one year. Initially, the short WALE might raise red flags about the property’s potential viability. However, the developer recognises an opportunity. They plan to renovate and modernise the property with a focused strategy, attracting new tenants and renegotiating lease terms.

The developer sees the short WALE as an opportunity to improve and increase rental returns. Using shorter lease terms, the developer increases the value of Property Z over time.

Conclusion: Empowering Informed Decision-Making

The examples show how WALE is more than just numbers and can help make decisions effectively. People who invest in property, develop properties and are interested in them use WALE to understand the changing world of commercial real estate. It helps them choose innovative strategies, ensures stability, and shows how the property reacts to market changes.

WALE looks at how much time leases last on a property. This helps us see how stable the property is, how much potential it has, and how it responds to market trends. With this knowledge, people can make better choices that match their investment goals and stay strong even as the real estate market changes.

We suggest you carry out this exercise on your property/portfolio. As you can see from the above, a high or low WALE depends on your commercial property investment objectives and the condition of your property.

On the surface, a long WALE is typical of a suitable type of long-term investment. However, it could prevent a commercial property investor from maximising its potential sooner—for example, upgrading/refurbishing for higher-paying tenants.

The general economy, government policy and property investment market change constantly. Keeping up to date and becoming aware of how these changes can affect you is crucial.

We recommend that our clients consult a commercial property expert to review their leases. This will help them develop a long-term and short-term commercial real estate investment strategy.

If you would like to discuss your property investment plan and possible highest and best use for your property, feel free to contact me, Con Tastzids, at CST Properties for a no-obligation, confidential discussion.

 

Con Tastzidis - Sydney Commercial Real Estate Agent & Business broker

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 40 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 possesses a profound understanding of the intricate dynamics that drive success in this arena.

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. More importantly, how working with Con can work for you. Con has been featured in several national and international media outlets, including FOX, CBS, NBC, ABC, CNN, and BLOOMBERG.
If you would want to work with Con, he can be contacted through this link Feel free to contact Con Tastzidis at CST Properties.