Key Considerations for Increasing Commercial Property Rent
Are you a property owner who is thinking about increasing your rental prices for your commercial properties? While it might be tempting to raise the rent for your current tenants, it's important to consider the market forces. Here are some key factors that you need to take into account when making this decision.
Specific property costs are not included
It's important to note that specific property costs should not be used as a basis for raising rental prices. Just because you have recently had to spend money on repairs or maintenance does not mean that you should immediately increase the rent. This is because property-specific costs do not reflect the wider market conditions that drive up prices. Instead, it's important to have a cash buffer set aside for unexpected expenses.
Vacancy rate
If your property is located in an area where there is high demand for commercial properties, it may be an excellent time to increase your rental prices on incoming tenants. However, if you're considering increasing rent for current tenants, you should be aware that this could result in them looking for a new property and therefore creating a vacancy.
If you are in an area where there are many vacancies then increasing rents too much for existing tenants could result in them leaving to take up another property offering incentives and a lower rental.
It's important to consult with your property manager and other trusted advisors to ensure you make the right decision for your property.
Market performance
Research the property's suburb and surrounding areas to get an idea of the median rent, median sales price and average rental yield. This will give you a sense of whether your property is in a prime location to command a higher rent and if your current rentals are at or around market rental rates.
If you have not increased your rental rates annually for a number of years and you now find your tenant way behind the market rental then it may be better to stagger the increases to reach the market rent rather than one hit with a huge increase which may mean your tenant moves out because they cannot afford to be there. This may add costs for you for vacancy time, leasing fees and advertising costs and on many occasions a capital expense to bring the property up to scratch with compliance and repairs and maintenance for a new tenant. It is therefore important that you do the annual rent reviews so that the rent does not get too far behind the market rental.
Ideally you want to look at the long term rental and not short term which can see rents rise significantly but may be unsustainable from a business point of view over the long term.
Finally, when making the decision to increase your rental prices, you should weigh up the cost of vacancy against the potential rental increase. If you're considering an increase in rent, but the cost of a few weeks or even a months vacancy will negate the potential gains, it may not be worth it. This is where having an adequate cash buffer set aside is important in case of extended periods of vacancy at your commercial property.
In conclusion, when deciding whether to increase the rental price of your commercial property, it's important to consider market factors such as vacancy rates and market performance and economics. By taking a comprehensive approach, you can make an informed decision that benefits both you and your tenants long term.