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The risks and benefits of single tenant rentals

On Behalf of | Jun 2, 2021 | Uncategorized |

Renting a commercial building to one tenant and the benefit of collecting rent and dealing only with that tenant, was considered an easier way of transacting business. But the lockdowns and rise of telework over the last year increases the possibility that single tenants will leave commercial rentals and owners will lose their buildings. This illustrates the commercial real estate risks and advantages of having a single tenant.

Benefits

Commercial leases usually last for many years and help protect commercial landlords from foreclosure. Only 2.2 percent of office buildings were delinquent in March.

Risks

However, commercial buildings lose value when tenants leave. For example, a Houston office building lost two major tenants and its value dropped from $121 to $25 million.

A loss in value also brings other problems. Financial institutions are more reluctant to refinance mortgages when this occurs, and this could lead to the owners’ loss of their buildings.

Solutions

Commercial landlords may consider leasing to multiple tenants instead of seeking a sole tenant. This will involve creating spaces for many tenants instead of building for one tenant. Having multiple smaller tenants may also attract a larger tenant to the building.

If a tenant leaves, building owners can use the vacancy period for renovations. Landlords predicting the return of telecommuting workers are spending money on upgrades to make their buildings more attractive to potential tenants. Owners may also consider converting offices into apartments.

Making changes

Landlords should change way they present office space regardless of they are seeking one or multiple smaller tenants. Tenants and office workers desire safer buildings with proper ventilation and disinfection of high touch areas.

Real estate has a better chance of success by paying down their mortgages and acquiring less debt. This places them in a better position to refinance their mortgage which produces the capital for reinvestment in the building.

Attorneys can assist with leasing and other commercial real estate issues. They can also provide representation and protect rights in landlord-tenant disputes.