7 WAYS TO INCREASE THE VALUE OF YOUR COMMERCIAL PROPERTY

7 Ways to Increase the Value of Your Commercial Property

Increasing the value of a commercial property can bring many benefits for landlords.

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With owning commercial real estate comes keeping your property in order and maximizing its value. This can have a huge impact not only on the tenant businesses’ productivity and efficiency, but also on the value of the property. Increasing the value of a commercial property can bring many benefits for commercial property owners / landlords.

The higher marketability of the commercial property is another benefit that comes with increasing the value of your assets. A higher-value asset can attract more buyers and tenants in the market, leading to an increase in its overall value. 

Finally, property owners can receive certain tax benefits when their assets’ value increases. In this blog, we will discuss how to increase the value of your commercial property and leverage it to get more from your investment.

1. Raise Rents to Increase Value of Commercial Property

This seems like a no brainer, but raising rents is one of the easiest and fastest ways to increase your cash flow and overall property value. But it has to make sense. 

Conduct A Market Analysis

To increase commercial property value, you can contact a commercial associate to conduct a market analysis and see what average rents are for similar properties.

Evaluate the neighborhood, find rental comps, calculate rental income, determine the costs, and research the current economic market. Have you made recent renovations to the property that would account for raising rents? 

Rental rates should be reviewed everytime you need to lease space or a curent tenant’s contract runs out. 

Working with a commercial associate to understand the current market and your property’s value and features will allow you to increase commercial property value and stay up to date on trends and economic forecasting to position your commercial property for maximum return on investment. 

Set Rental Escalations

Rental escalations are a common feature of commercial leases, as it allows landlords to do more than just increase their commercial property value. The purpose of setting rental escalations is to adjust the rental rate to account for charges in market conditions, inflation, and the cost of living over time. 

Commercial leases often provide for annual rent increases at a fixed rate (often 2-3%, sometimes even 4% depending on the type of property and historical trend of rent growth, etc.). Sometimes, these increases are not annual, but rather every two years or few years, or occasionally, there are no increases in the initial terms of a lease, with increases occuring during the renewal term. 

By setting rent escalations in your contract, you are overall increasing your commercial property value and cash flow. 

Types of Rent Escalations

  1. Fixed Increases – Fixed increases raise rents by a set amount or set percentage on a previously agreed-upon timeline. However, this does not take into account changing market conditions. 
  2. Indexed or Variable Escalation – This is when you raise rents in the contract in proportion to increases in established economic indexes, such as CPI.. However, tenants may not favor this sort of agreement. And, in may not account for local increases, but only national – and the two may differ. 
  3. Pass-Through Escalation – This time of rent escalation typically only is utilized when the landlord has an increase in specific costs that are laid out in the lease agreement. For instance, this could mean a commercial tenant is responsible for reimbursing a landlord for building operating expenses and/or common area maintenance.

Reevaluating Your Property's Value to Increase Rental Rates

To increase commercial property value, you may also need to reevaluate what your property is worth overtime. 

If upgrades have been made to the commercial property after the lease execution, determine how the improvements to the property can justify your rent increases for renewals and future tenants. Examples of commercial property improvements are discussed below. 

Pay close attention to both the upper and lower level of rents that are being charged for similarly situated types of real estate, so you don’t price yourself out of the market. 

An experienced commercial real estate associate can help you navigate this and overall increase your commercial property value!

Increasing Commercial Property Rents in Contract and for New Tenants

2. Minimize Expenses to Increase Commercial Property Value

In addition to bringing in more revenue, another strategy is to cut down on expenses. It’s not unexpected that the operational expenses of a building vary based on the category of commercial property. 

The costs associated with an office or retail space differ from those of a multi-family building. In commercial properties, several expenses transferred to tenants are divided between leaseholders and the property owner. By reviewing your operating expenses, you can determine areas where you can increase commercial property value.

Fortunately, there are several ways that this can be done.

Consolidate Commercial Property Expenses

First, gather statements of all your historic operating expenses to review. Analyze these statements for areas that you could consolidate or cut out costs completely. Think outside of the box here. 

The solution could be as easy as switching to LED lightbulbs or even using more energy efficient resources. Or, you could improve the exterior of the building, its curb appeal, the parking lot, invest in new security measures, and renovate the interior to look more modern.

Figure out where you can save or cut costs on your commercial property

For marketing purposes, consider naming the property and creating a reputation and image for it that is known by consumers and future tenants alike. By branding the property, it becomes more memorable and marketable. 

In addition, evaluate using a commercial property management company, or reevaluate the one you are currently using. Are your property managers not recouping all the expenses possible? Is it being mismanaged? Are you uncertain of how to best manage the property and needing to look into property management solutions? 

Having a property manager that is knowledgable and completely on top of the management of your investment can make all the difference. The costs of hiring the property management company can be very little in comparison to the value they bring in terms of saving you dollars or increasing your property’s worth with their techniques and advice. 

Consider M&D Commercial Property Management if you’re in the market for a five-star property management company. 

Review Tenant Lease Types

You can also hedge against expenses by structuring your tenant(s) lease types better. You could adjust the terms from gross leases to net, double net, or triple net. Changing lease type could allow for more expenses to be taken off the landlord, passed to the tenant, and overall increase your commercial property value and cashflow.

Let’s explore the types of leases you could institute in your contracts with your tenants. 

A complete-service lease, commonly referred to as a gross lease, involves the landlord covering all property operating expenses, including taxes, insurance, maintenance, utilities, and janitorial services. The tenant pays a fixed rent that encompasses these costs along with the landlord’s profit margin. 

While a gross lease provides simplicity and predictability, it does expose the landlord to the potential risks of increasing expenses and reduced net income. Opting for a gross lease may be suitable for landlords with a stable, well-maintained property and low vacancy and turnover rates.

A triple net lease, alternatively termed a net lease or NNN lease, places the responsibility for many of the property operating expenses, along with the base rent, on your tenant. As the landlord, your sole obligations pertain to structural repairs and capital improvements in this scenario. 

While a net lease transfers more of the financial risk and expense burden to the tenant, it simultaneously diminishes your control and influence over the property. Opting for a net lease may be advisable if you possess a recently constructed or renovated property with high-caliber tenants and extended lease agreements.

Expenses passed to the tenant in a net lease often include: Common Area Maintenance (CAM), property taxes, insurance, utilities, janitorial, security and supply costs.

A modified gross lease, or modified net lease, involves a negotiation between you and your tenant to share the property’s operating expenses. For instance, you might cover taxes and insurance, while your tenant assumes responsibility for utilities and maintenance. 

Typically, the rent in a modified gross lease falls between that of a net lease and a gross lease. While it provides more flexibility and equilibrium compared to a pure gross or net lease, a modified gross lease demands increased communication and coordination between you and your tenant. 

Opting for this type of lease may be beneficial if your property incurs variable or seasonal expenses and accommodates a diverse tenant mix.

A percentage lease means your tenant pays a base rent in addition to a percentage of their gross sales or revenue. Widely used in retail and hospitality settings, this lease structure allows landlords to share in the tenant’s success and expansion. 

While a percentage lease aligns your interests and incentives with those of your tenant, it is contingent on their performance and profitability. 

Opting for a percentage lease may be advantageous if your property is situated in a prime location with substantial foot traffic and robust consumer demand.

 

When assessing lease options to optimize your cash flow, take into account multiple factors, including property type, tenant industry, financial objectives, operating costs, competitive advantage, and other relevant considerations. Employing a spreadsheet or specialized software can aid in computing and comparing metrics such as net operating income, cash on cash return, and internal rate of return for each lease type. 

Seeking guidance from a commercial real estate broker or attorney is valuable for negotiating and formulating lease terms tailored to meet your specific needs and expectations. Contact a commercial associate to help you navigate which lease type is best for your commercial property.

The main reasons a percentage lease could be attractive to a tenant is because they usually enjoy a lower base rent and the landlord then has an interest in seeing the business succeed and is more likely to help promote the business and improve the property to improve their income. 

Obviously, the advantage of a percentage lease for the landlord is the ability to increase income made from the tenants’ sales. But a disadvantage could be the lower base rents and ensuring you are getting accurate financial data and sales amounts from the tenant to determine the payout. 

3. Cosmetic Updates to Increase Commercial Property Value

Now, let’s dive further into the type of improvements you could make to your property to increase its value. 

It is vital to make cosmetic updates from time to time to ensure your property is attractive and marketable. Take a step back and really look at your property. 

Aesthetic improvements such as a fresh coat of paint, new décor elements in the common areas of office spaces, or new flooring can make a huge improvement to increase commercial property value. This does not have to be a full makeover, but small updates like adding landscaping can make a significant difference in your investment. Regular upkeep and repairs will keep your property looking its best, which can increase commercial property value.

Some great aesthetic improvements that can create the most value include refreshing the facade, landscaping, and signage. 

While this can seem like a big investment, take into account the fact that target increased annual sales by 8.7% in two years based solely on renovating their stores. 

When consider what types of outdoor space updates to make, consider: regular trash pick up, adding benches, tables chairs, adding sidewalks, painting the outside brick, keeping up with landscaping or improving the landscaping.

4. Add Amenities to Increase Commercial Property Value

You can also consider adding new amenities to your property to increase its value. 

Value enhancing amenities can include something simple like installing a playground for a multi-family property or adding a conference room for your office tenants. Additionally, one of the biggest value-add improvements for office buildings is adding a health and wellness / fitness center. 

Some amenities added could even be income-producing, like putting in a vending machine in the facility that you and your tenants and their customers could benefit from. In a recent survey, Ware Malcomb’s 2022 Pulse Survey, 20% of those surveyed reported that health and wellness centers were in their top three amenities that would add the most value to an employee’s experience. 

Another factor to consider is whether you or your property management company is creating a sense of belonging and community at your property – especially if it is multi-family. For instance, are there regular happy hours, family nights, giveaways, potlucks or holiday parties? These types of engaging activities can also increase the value of the property in the eyes of tenants, making your property that much more likely to retain tenants and secure new ones. 

Health and Wellness Centers Add Value to Commercial Offices Spaces

5. Change the Purpose of the Building to Increase Commercial Property Value

Another way to drastically increase the value of your commercial property is to consider repurposing the space or using the building for a purpose other than what it was originally intended for (with city and zoning allowance). 

For instance, imagine a large industrial warehouse in the heart of downtown — or a large office space no one is using from the 1980’s or 90’s in a big metropolitan city that could be purchased and repurposed on the cheap. 

To determine the value of such an investment, look at what the renovation expenses would be compared to how much you stand to gain. 

While this building was built for the purpose of industrial use or office use, imagine what the worth could be if you converted it into a trendy restaurant or stylish multi-family apartments. Of course, a conversion project like this would be a massive undertaking, but it could pay off in time if done correctly and increase the value of your property remarkably.

In fact, a new initiative announced by the Biden-Harris administration helps accelerate conversions of commercial properties to residential uses. 

“HUD’s Community Development Block Grant Program – $10 billion of which have been allocated during this Administration – provides grant funding that can be used to support acquisition and rehabilitation associated with the conversion of commercial properties to residential uses,” according to the White House’s resource and instruction guide for these types of conversions. 

Dallas-Fort Worth is growing at a rapid pace right now, with more housing demand than ever. Then, office space vacancies have reached a record 20% this year. It may be worth looking into to see if converting one of these office buildings to residential space, utilizing available grants and resources, could improve your current commercial investment portfolio.

6. Cut Down on Vacancies to Increase Commercial Property Value

Even if you make significant improvements and repairs to your property, it will not be worth much if it’s vacant. 

After all, one of the easiest ways to lose money in commercial real estate investing is through vacancies. 

Contact an experienced real estate agent that can help market your property and find qualified, long-lasting tenants. A property that is fully leased is worth a great deal more than a vacant building.

Reasons for Vacant Commercial Properties

Job Loss and Economic Recession: As individuals lose their employment, they relocate in search of new job opportunities. Consequently, businesses are forced to shutter, leaving empty storefronts in their wake. Similarly, during economic recessions, shifts in consumer behavior, such as a decline in luxury item purchases, compel businesses to either cease operations or relocate.

 

Changes in Consumer Behavior: Consumer preferences are perpetually changing, leading to shifts in their expectations from retail stores and restaurants. The surge in online shopping has compelled brick-and-mortar establishments to adapt or face extinction, as they strive to align with evolving consumer demands.

Commercial properties can remain vacant for various reasons, and while pricing is seldom the primary factor, physical considerations such as outdated facilities, suboptimal location, and insufficient parking can contribute to vacancies.

The building’s location plays a pivotal role in attracting potential tenants, with being situated in a vibrant area and offering modern facilities, including ample parking, being critical factors that distinguish a property from its competitors.

Zoning Laws: Zoning laws, a legal consideration, often stand as a significant factor leading to the vacancy of commercial properties. These regulations differ across cities, imposing restrictions on the types of businesses permitted in specific areas and even dictating operational hours. Numerous commercial properties find themselves ineligible for commercial use due to zoning limitations, rendering them unsuitable for such purposes.

 

Property Taxes: Property taxes pose an additional challenge for maintaining occupancy in commercial properties. Even if a commercial property is vacant, property owners may still be obligated to pay taxes, irrespective of whether it is utilized for residential or business purposes. While certain cities may provide tax incentives to encourage property owners to lease out their vacant spaces and ensure occupancy, such incentives may not be universally available.

The easiest ways to lose money in commercial real estate investing is through vacancies

Strategies to Fill Vacant Commercial Properties

According to forbes.com, effective marketing and advertising stand as the optimal means to attract potential tenants for vacant commercial properties. 

At M&D Commercial Group, we have a world-class, in-house marketing team that is here to market your commercial property. 

We use cutting-edge technology to get you maximized exposure and better return on your investment. If your commercial real estate agent and property manage company is not utilizing the following strategies to lease your commercial space, you should find new help. 

At M&D Real Estate, our commercial agents and commercial property management company utilize all of the following methods (and more) to ensure our commercial owners’ properties lease quickly, minimizing vacancy time and lost income. 

M&D Real Estate's Cutting-Edge, Top 10 Marketing Strategies to Fill Vacant Commercial Properties

  1. Price Setting is crucial. Is your property priced at the exact rental rates to ensure your income, while also meeting the market where it’s at for your type of property and location?
  2. Attractive Commercial Property Flyers listed on the top digital platforms, including CoStar, Crexi, CommercialEdge, and more. 
  3. Property Website with all information, retail maps, photos, video, and contact information for how to learn more or tour the property. 
  4. Digital Ads on Google or Social Media Sites to get more exposure for the property.
  5. Custom Property Website that advertises the tenant’s business. This makes properties more attractive to tenants. 
  6. Large, professional, and prominent FOR LEASE sign at the property with contact information for the agent printed to be read and written down easily. 
  7. Sending your property to a database of commercial lease leads, as well as EDC contacts, and press releases to local media. 
  8. Create a Google My Business page for the property to enhance exposure and branding opportunities.
  9. Create a blog about the property inserting important keywords to share on social media sites and with a commercial lease lead database.
  10. Reach out to potential tenants through Facebook Groups, LinkedIn and other channels.
Property Management Marketing in Rockwall TX

7. Find an Excellent Property Manager to Increase Commercial Property Value

As mentioned previously, sometimes all that’s needed for a property is for it to be looked after and at through a different pair of eyes. A qualified property manager can help with just that. 

Property managers may be able to give you ideas on increasing income, decreasing expenses and giving your property a fresh, new look and feel – and create a timeline for it and budget that makes sense. Managers not only will give you their perspective, but they will handle the other necessary tasks of owning a commercial property like organizing maintenance needs and repairs, collecting rents, account reconciliation, and more. 

The benefit of a property manager is taking the hassle away from you and it is their job to make sure your property is well taken care of, which will overall, increase its value for you.

M&D Real Estate offers five-star property management for any of your commercial property needs. We care for your property and maximize your return on investment by treating your property as if it were our own. 

When you choose M&D Property Management, you will receive monitoring of operating expenses and budgeting, a track record of long-term successful tenant relationships leading to high retention, a highly knowledgeable team with decades of experience, regular visits to your property for risk management and protection, top of the line marketing for your property to minimize vacancy loss, transparent reporting to ownership with detailed monthly statements, and marketing your property to drive traffic to your tenants.

M&D utilizes the latest technology, tools, techniques and employs only the most experienced and expert of property managers and maintenance staff to ensure your commercial property is managed competently. We are also always available. We communicate with owners regularly, prizes ourself on transparency and our commitment to you. M&D services all of the Dallas-Fort Worth Metroplex and surrouding areas. 

M&D provides management and agents for single-family residential properties, multi-family, industrial, office, and retail properties. 

Contact us today to learn more. 

Use Property Management to Ensure Your Commercial Value Increases

Summing Up How You Can Increase Your Commercial Property's Value

In sum, while it may seem like an overwhelming task, there are several strategies that can be easily implemented to help increase the overall value of your property. 

Enhancing the value of your commercial property requires a strategic and multifaceted approach that considers both physical and operational aspects. By investing in regular maintenance, energy-efficient upgrades, aesthetic improvements, and more, property owners can create a more appealing and functional space. 

Additionally, fostering positive tenant relationships and optimizing property management practices contribute to overall property value. Staying abreast of market trends and adapting the property to meet evolving demands ensures long-term viability. 

Ultimately, a well-maintained, efficiently managed, and strategically positioned commercial property not only attracts higher market value but also provides a stable and lucrative investment for the future. When investing, don’t look at a property only as it is, but for the potential of what it could become!

And if you have any questions, M&D Real Estate is a full-service firm here to help you with all your residential, commercial, and property management needs. 

Are you interested in finding a way to increase your properties’ value? Contact one of our five-star commercial agents today to get started!

At M&D Real Estate, we have 5-star agents who are ready to help you with all your commercial real estate needs
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