Will 2022 Be the Year of the Red Hot Tenant Market in CRE?
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
When everything in the commercial real estate world starts feeling uncertain, it’s time to go back to the fundamentals. Break down any real estate decision into the two main branches: are you looking to rent a property or purchase it outright?
A tenancy is a big deal, and landlords and tenants go hand in hand. The landlord benefits from ongoing income, but the tenant gets a building they didn’t have to purchase themselves. Sometimes the capital expense of purchasing is just too high. If they have gotten financing to start a business, most tenants are going to want to spend that on renting instead of buying property.
In 2022, the tenant market will continue to grow because all of the pieces of the puzzle are finally back in place. People are out spending money again, which in turn means that they want to have somewhere to shop in person. While the e-commerce world certainly got a boost at the height of the pandemic, the reality is that consumer behavior is still wired for an in-person experience where they feel supported and valued.
A Fractured Market with Varying Vacancy Rates
As a society, we are seeking experiences that matter to us. It is the difference between getting a Build-a-Bear shipped to you, and being able to go inside the store and build it yourself while feeling the different textures and materials in use.
Different parts of the country are dealing with differing rates of vacancy in their local markets. Ann Arbor is experiencing a sharp uptick in demand for remote working, which is taking away from the office space demand considerably. Businesses are making tough decisions: do you keep the doors open, and take the hit every month in terms of rent, or do you give yourself a chance to save on those expenses?
In 2021, over 11.7% of office space remained vacant in the greater Ann Arbor area. Compare this with just 6.6% of office space in 2019. The difference really does make an impact on the market.
Compare this with Bangor, and the picture becomes very different. Although remote work is in full swing, the demand for office space is higher than ever, with a very low amount of vacancies.
A hot market for tenants means that there are opportunities for landlords with properties of all sizes. If you’re looking to make the most of commercial real estate for rent opportunities, this is the guide for you.
Consider Entering the Flex Rent Space
Now, a lot of our former guides on real estate in the commercial sense are wrapped around the tried and true favorite, long-term lease agreements. Yet, as the market changes, we think that you have to change with the times.
Today’s business owners are taking on more risk than ever, and they also went through an unprecedented pandemic event, which changed their confidence in terms of being willing to sign a lengthy lease.
A shorter renting period gives tenants the chance to see if a concept will actually be successful, without having to worry about early termination penalties lurking in a traditional lease agreement.
The benefit for the landlord is that you can charge a premium for the shorter term. Since you aren’t going to be able to count on that money for three, five, or even ten years, you have to make sure that the deal benefits your company as well as the tenant.
Another Popular Short Term Rental Idea: Coworking
For many self-employed people, the office isn’t their first destination. Yet the idea of drinking coffee in a coffee shop hunching over a laptop isn’t their idea of a great time either. Even though we’re more inclined to go virtual, we still want to feel connected to other people. This is where the coworking concept really comes to life.
Today, you can offer temporary space in an office building by the day, the week, or the month. You’ll want to keep prices competitive, especially if there are other coworking spaces. It tends to be a great proposition for landlords because the risk of damage to the property is quite low. You also don’t have to offer tons of amenities in order to make the coworking space attractive, though the extras can help bring in people that will spread the word about your cool new space.
Screening Procedures for Tenants
Just as you would screen tenants for residential properties, taking the time to screen tenants for short-term commercial rental periods is equally important. The key here is that while you will have people with less time in business go ahead and apply, you still need to get to know them. Do they have any type of business track record? Are they willing to put a higher deposit down if they’re a newer entity?
Getting references and other documentation is an important part of the process. If you choose to have less documentation, that risk should also be reflected in the total monthly rent for the space.
Taking Advantage of a Fast Rental For Your Own Business Ideas
Who says that you can’t rent a property yourself? For example, you might own a self-storage facility that is doing well, but you want to expand into another business. Short-term rental agreements let you test entrepreneurial ideas for your own business dreams. The same advice that we give to tenants in this guide would also apply to your own search for commercial real estate for rent.
Considerations for Moving Forward
Giving yourself multiple options as a landlord in today’s hot tenant market is wise. A good market doesn’t mean that the fundamentals go away; if anything, they become even more important. If you don’t already have a short-term rental agreement for your commercial property, you can have your attorney draw one up. Of course, we know that not everyone has an attorney on the proverbial speed dial, but these contracts are too important to try to just grab a template online.
Invest in having an attorney draw up a short-term rental agreement based on what you want and need that document to contain. While it’s true that tenants will want concessions, the beauty of the short-term rental agreement means that you can put up your commercial real estate for rent and know that prospective tenants will pay a premium in exchange for more flexible terms.
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