2024 Lease Expirations Series — Industrial Landlord Perspective

This is the second article in a small series on lease renewals that will be published throughout March and April. I’ll discuss common questions and strategies for those facing lease renewals in 2024. I’ll keep it short and to the point. If one of these 3–4 minute reads resonates, reach out and we’ll dive deeper into your situation.

We’ll look at the renewal question from the prospective of:

· warehouse/ industrial tenants

· warehouse/ industrial landlords

· office tenants

· office landlords.

Warehouse/ Industrial Landlord Renewals:

In our first installment we looked at lease renewals from the prospective of a tenant in an industrial or warehouse property. We’re speaking with a lot of tenants that are seeing large increases and renewals. The first article (linked here) did a good job explaining tenant strategies.

For this installment, we want to move to the other side of the table. What should a property owner or asset manager with lease expirations in 2024 consider?

(Shameless plug: This, of course, is a major part of our business at Knapp Commercial Advisors. We help Industrial property owners maximize the value of their properties, minimize headaches and operating inefficiencies and increase the overall satisfaction of ownership. Call us!)

Here are a few strategies for a landlord who is dealing with lease expirations.

Sell the building!

Before you discount this, hear me out. The buyer market for investment grade real estate LOVES a value-add story. If your building has under market rents, with a low WALT (weighted average lease term) the story for the market writes itself. We will craft a story showing the building as a value-add opportunity and given the amount of capital chasing so few deals, we might be able to price in a lot of the upside in the sales price. Effectively, selling with the right messaging enables an owner to receive some of the benefit of higher rents without having to actually do the work and spend the money to get the rental increases. It doesn’t make a ton of sense, but it is where we are in the market.

Give notice of non-renewal to difficult tenants

If there is a tenant company with below market rents and a lease expiration, it’s probably best to not renew that tenant. Perhaps they take up too much parking or pay rent mid-month. Whatever the case, this is the time to move on from them.

Now the difficult conversations.

The great tenant who is 60% of current market rent

This is where we come into play. We will need to determine two key items:

1. How likely is it that the tenant stays and at what price do they stay?

2. How long will it take us to backfill that tenant?

Conversations have to be had. And from experience, they are probably conversations best had through an intermediary that can be blamed. Send the leasing broker to tell them rents are moving from $7/ft to $12. See the reaction and in the worse case, if you just don’t want to lose that tenant, blame the broker for being overly aggressive and settle where you feel comfortable. Tenants know the market just as well as owners and brokers — have those talks and see where their “line in the sand is.”

Diversify Tenant Mix

If you have a few lease expirations, it is a good time to examine your overall tenant mix. If 80% of your tenants in a business park or your portfolio are within the same industry, you may run into a problem down the line. Small bay parks are notorious for this. The parks will easily lease up to companies with different skill sets but all the same customer — the affluent, suburban homeowner. This is great, until it isn’t. Study the interconnectedness of your tenant’s customer and make sure your portfolio isn’t overly reliant on one sector of the economy doing well. Especially if that sector is cyclical.

Marginal Increases with Shorter Duration

Some property owners I speak with aren’t looking to maximize the value of their properties. It is more important to them to maintain occupancy with strong tenants who don’t cause much of a stink. I get it! My solution in these cases is to increase what you feel comfortable, but on shorter duration leases. This provides flexibility should your situation change and in the future you want to pursue a sale, refinance with bank debt or move in higher paying tenants.

Each building is unique and each owner is unique. If we can help you in any way, please reach out.

Visit us here to learn how we lease office and industrial properties.

If you are a tenant and trying to get the upper hand in negotiations, visit our site on Leasing Industrial Warehouse Space and we’ll take care of you.

For More on Nick visit Marietta CRE.