Don't Overlook the Smaller Commercial Property

Large commercial transactions attract the headlines. Yet a smaller office, warehouse or shop can be a significant investment for its owner and an essential part of the business occupying it.

These properties are often judged quickly by their price, rent and advertised yield. Each figure matters, but none tells an investor whether the space will remain useful to tenants.

A small warehouse, for example, might have modest floor area but excellent vehicle access. A suburban office may suit a professional business because its clients can park nearby. A local shop may draw interest because of the surrounding businesses and the customers they bring to the area.

Look beyond the current tenant

These practical qualities can have a direct effect on future leasing. A property that works well for several types of business may give its owner more options if the current tenant leaves. A highly specialised fit-out, on the other hand, may be valuable to one occupier but costly to adapt for the next.

That is why investors should look beyond the current tenant and ask who else could occupy the space. Would its layout suit another business? Is the building in good condition? Would significant work be needed if it became vacant? How much competing space is available nearby?

The scale of a potential vacancy

Investors should also think about the scale of a potential vacancy. In a single-tenant property, losing that tenant may mean losing all rental income until the space is leased again. Allowing for that possibility when assessing the purchase is part of understanding the investment, regardless of its price.

The lease deserves the same attention. A strong passing rent is appealing, but investors need to understand the tenant, the remaining term and the costs they may face as owners. A smaller purchase does not remove the need for careful due diligence.

Local knowledge counts

This is where local market knowledge counts. Agents who know which businesses are expanding, relocating or looking for a different type of space can provide insight that a headline yield cannot.

Smaller commercial properties may receive less attention than landmark assets, but they deserve the same discipline. The most useful question is simple: who will want to use this space, and why?

Tom Donnelly is Head of Commercial at NAI Harcourts. This piece was contributed to Real Estate Today Australia.