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2 Helpful Habits for Owners to Mitigate Rent Roll Risk

Here are two habits that all owners — regardless of portfolio size — candevelop to mitigaterisk intheir rent roll.

#1: Proactively diversify lease term and future rollover

A lot of time is spent negotiating deal terms to maximize the value of a deal or asset. Despite this hard work, the impact that term has on overall asset value and risk profile is often overlooked. Is the lease you’re negotiating coterminous with other large tenants? Does your lease rollover leave you overly exposed in certain years?

Reducing this risk will help your team retain / renew tenants, refinance / sell assets, and ultimately create value. An easy place to start is focusing more on term and expiration during the leasing process. Here are a few things to consider as you lease up new space:

Use WALT as quick KPI: Not your friend WALT — but the “weighted average lease term.” What is your WALT today vs. your WALT after executingthe new lease? WALTAre you extending your WALTor shortening it? Having a longer WALT often increases the value of your asset.

Always consider the impact that a lease will have on any given year’s rollover: As helpful as WALT can be, having an up-to-date expiration schedule provides the full picture. All too often, deals move fast and this information is stale or takes too long to update. The good news is technology, like VTS, solves this. With the right data at your fingertips, you can more effectively prevent too many co-terminous leases.

#2: Routinely look at mark-to-market and tenant activity

For existing tenants, the lease terms are what they are. However, there are several items you can review and questions to consider that will help you assess the potential risk of those tenants:

Expiration rents vs. market: Are lease expirations a risk or an opportunity? Knowing how your tenants compare to market can help identify if a tenant is a risk or an opportunity. If the tenant is below market, their expiration could be an opportunity to secure a renewal (or new tenant) at favorable terms.

Do you have context around your tenants’ needs? Understanding the activity, health, and needs of a tenant is another way to see if they are a likely risk or opportunity. What is the state of their business? Are they growing or shrinking? Who are the decision makers? Where do employees live? All of these types of question can help signal if the tenant will likely renew.

These two habits can help you approach new (or renewing) leases proactively and with a clear strategy to reduce risk or exploit opportunities. Knowing well in advance that a tenant will be above market at expiration expands the tools you can use to ensure they stay and you can preserve as much income as possible: early renewal, blend and extend, etc. Have a tenant who is below market...well that is a good problem to have!

Billy Fink
Billy Fink
Billy Fink is a former member of the VTS team. Subscribe to the VTS blog: https://blog.vts.com/
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