When commercial property owners run into the problem of major vacancies in one of their buildings and struggle to attract new tenants immediately, they have a couple of options to choose from. They can hit the panic button, lowering rents and accepting a lower profit margin to fill the vacancies right away, or they can reinvent the space through a large-scale remodel that will enable them to bring in higher rents once the renovations are finished.
The latter option requires capital and patience, and comes with some inherent risks. But I’ve seen several owners undertake this type of project and profit significantly from it. I believe that, when done correctly, remodeling in the face of major vacancy is the best way for a commercial property owner to turn one step back into two steps forward.
About two years ago, one of our property management firm's clients — who owns a six-building medical and professional complex in Alhambra — faced a large-scale vacancy when he lost a tenant who occupied 15% of the buildings’ leasable units. Instead of dropping rents, he invested $1.1 million in remodeling the property. In doing so, he made the complex more environmentally sustainable through lighting, water fixtures and building materials choices, thereby lowering his utility bills. The renovation also created an improved working environment for all the existing tenants by introducing an upgraded facade, landscaping, furnishings, fixtures and parking.
Though the remodel of all six buildings took a year in total, the owner was able to increase rents by 20% and decrease downtime between tenants, immediately filling one large vacancy that had sat for a year before the renovations. In this way, the project has effectively already paid for itself and will continue to increase the owner's margin of profit. By “doubling down” instead of implementing stopgap rent decreases, he substantially improved both his bottom line and the quality of his assets.
To get a clearer picture of whether or not you should remodel your commercial property, ask yourself these four questions:
1. Has it been at least 20 years since you last remodeled?
If your remodel is old enough to buy beer, it’s ripe for a tune-up. In the case of our client, his complex had seen almost no changes in 35 years, so the choice was clear. But anything that’s gone over two decades without renovations is probably not fetching the rents it could after updates and improvements.
2. Is the economy doing all right?
A recession is the wrong time to remodel, but if the real estate market is thriving, you stand to profit quite a bit from doing so.
3. Have you consulted with a leasing agent?
A key step in evaluating whether your commercial property is right for remodeling is consulting with an experienced leasing agent who knows the ins and outs of your property type. Their professional opinion should take into account all factors specific to the location of your property, and if they give you the go-ahead, it’s almost time to start planning the details.
4. Do you trust your property manager to manage through the change?
In my experience, the service of a trustworthy property management company can play a crucial role in limiting the complications of a major remodel. Even during a large-scale vacancy, it’s likely you’ll still have a considerable number of existing tenants you need to accommodate and work around during the process. A remodel inevitably involves things like temporary power outages, elevator stoppages and repaving of parking lots, all of which affect tenants and test the capabilities of the property manager in charge. A skilled property manager can help to unburden owners of all tenant issues, keeping tenants notified of scheduling and catering to their ever-evolving needs during renovations. A remodel that drives away current tenants defeats its own purpose.
If you’ve answered no to any of these questions, it might not be time to remodel just yet. But if you can answer yes to all four, you’re already on the path to revamping your commercial space, improving its work environment and significantly increasing your rental profits.
