How Vacancy Rates Affect Commercial Real Estate Valuations

If you own a commercial rent roll and are preparing to sell or need a valuation, vacancy is a factor your valuer and eventual buyer (or lender, if you’re using it as an asset to put towards a loan) will take into account. 

Understanding how vacant buildings are treated in the valuation process can help you take steps to improve your final result. Take a look at this short guide, then contact us to find out more: 

Vacancy works differently in commercial portfolios

With residential rent rolls, the assumption is straightforward: properties are leased, and are usually never vacant long enough to affect the valuation (especially with Australia’s currently tight rental market). If a home can’t be leased after a few weeks, it probably shouldn’t be on your books anyway. 

Commercial premises are viewed differently. For example, a vacant retail space in a sought-after area is less likely to weigh down your valuation, since the reasonable assumption is it will be leased again within a comfortable timeframe. 

A vacant warehouse in an industrial precinct tells a different story if it has sat empty for three months or more. In this case, your valuer would likely assess it at a significantly lower rate than an occupied premises in the same location.

Vacant properties are never ideal on a commercial rent roll, but your valuer won’t assign merit in a blanket way because there are so many factors involved. 

What your commercial rent roll valuer will investigate

For every vacant premises, the valuers involved should consider:

• Likelihood of re-leasing: Is demand for this type of space strong or weak in the current market?

• Time vacant and time leased: A premises leased for short stretches followed by long vacant periods raises more concern than one with a stable tenancy history and a single, recent gap.

• Property type: Retail, office and industrial or warehouse space each behave differently when it comes to vacancy risk, and valuers should weigh this into their assessment.

Location adds another layer

Commercial rent rolls often stretch across a wider geographic footprint than residential ones, which matters for valuation purposes. A tenanted property in a regional area may still be valued at a lower rate than an equivalent property in a metropolitan centre, even if it is vacant, since the multipliers applied in regional markets tend to sit lower. Being fully leased does not guarantee parity with a similar property elsewhere.

Of course, vacancy is only one of the things your valuer will review. They will also look at factors like arrears, systems and even your agency’s reputation. 

Commercial rent roll valuation: What your valuer needs

Before you engage a valuer, take stock of every vacant premises on your roll. Note how long each has been vacant, what type of property it is, where it is, and its leasing history over recent years. 

The more detailed and up-to-date information you share, the more accurately your valuer can assess the impact a vacant property will have on your overall figure, rather than relying on conservative assumptions because they don’t have enough detail.

Vacancy is a normal part of managing a commercial portfolio, and it won’t always work against you in a dramatic way. A short-term vacancy in a strong location, backed by a solid leasing history, tells a very different story from a long-standing gap in a weaker market, and your valuation should reflect this.

The good news is the value of your rent roll doesn’t have to be set in stone. Offload a troublesome vacant property or put extra effort into finding a tenant and you may find you still have the negotiating power to achieve the price you’re hoping for.

BDH Valuers provides commercial rent roll owners with clear and detailed valuations. If you would like to understand how your rent roll would be assessed, how much it’s worth and how you can improve the value, get in touch with Ross.

FAQ

• Is it worth dropping the rent to secure a tenant before a valuation?

  Not always. Filling vacant commercial premises at a below-market rate can lock in a lease figure that pulls down the property's assessed value for the length of that term. If a valuation is imminent, it's usually better to speak with your valuer first. They can advise whether a signed heads of agreement, a short-term arrangement, or leaving the space vacant with strong market evidence will serve you better than a discounted long lease.

• How recent does my vacancy and leasing data need to be?

  Ideally within the last month before valuation. Commercial leasing conditions can shift quickly by sector and precinct, and older data (even six months out) may no longer reflect what a vacant premises could realistically achieve today. 

• Will one long-vacant property drag down the value of my whole commercial rent roll?

  A single problem commercial property is unlikely to reset the multiplier applied across your entire roll, but it can chip away at the total in two ways: the lost income itself, and the questions it raises for a buyer about how the roll is being managed. If a property has sat empty for a long stretch with no clear leasing plan, it's often worth deciding whether to actively re-tenant it, restructure the listing, or remove it from the roll before going to market.