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From bottle shops to big brands, who makes the best commercial tenant?

With such a wide array of business enterprises there's no such thing as the perfect commercial tenant - but some stand out more than others as being potentially ideal.

Bottle of wine on shelf in a liquor retail outlet, with customers in the background.
Bottle shops can be resilient in both good and bad economic times.

The type of tenant that leases a commercial property has never been thrust into the spotlight quite like it was in 2020 and 2021. With offices vacated and a wide array of businesses unable to trade due to pandemic restrictions, understanding a tenant and their business operations took on a whole new level of importance.

Over the past few years, there has been considerable interest in tenants whose businesses are deemed ‘essential services’, as well as businesses that have traded continuously and may have actually grown, such as those in the industrial sector.

Given the new business world that has evolved in recent years, here are some tips on the best types of commercial tenants.

Medical properties

Medical tenants are usually stable as they are backed by non-discretionary spending customers.

Customers need to visit these properties regardless of the economy, which makes them very attractive tenants for investors. Often zoning for medical tenants is more restrictive than for general retail even though they can be in similar locations.

The negatives are that the yields are often lower because people pay more for medical versus other types of tenants. And if you lose a medical tenant it can be harder to find another, as the pool is smaller than for other types, which can create longer vacancy periods.

Prices for medical properties can be as low as $500,000 for a small office suite all the way up to tens of millions of dollars for large, freestanding, purpose-built medical centres.

E-commerce

The pandemic-fuelled online shopping surge has boosted e-commerce sales and driven demand for warehouses and logistics space in 2021 and into 2022.

Everyone, from small online retailers to brands like Woolworths, looking to expand their e-commerce fulfilment capabilities or logistics giants like DHL, is looking for space.

According to Colliers International, “for every $1 billion spent on online sales, about 85,000sqm of warehouse space is needed”. And because demand for warehouse space has now outweighed supply, a huge benefit of these tenants is shorter vacancy periods.

The downside is that demand from investors has driven prices for these assets far beyond what they’re worth, so it’s important not to overpay. Also, with minimum overheads or fit out costs, these tenants can easily go elsewhere if there’s a better offer.

Government tenants

These tenants are found mostly in office or retail formats.

Government tenants can make for an incredibly stable investment because they don’t rely on turning a profit. Government-funded tenants rely on grants from taxpayers, and leases are generally at least three years, with six-year leases also common.

Prices start from about $400,000 but can reach into the millions depending on the floor space required.

Some examples of a government tenant may include electoral offices of local MPs, NDIS offices, EPA offices, health, education and transport departments.

Professional service tenants

These tenants are solicitors, accountants, engineers, financial planners, IT consultants and the like. These types of tenants run businesses that are often viewed as ‘essential services’.

They’re located in offices that can be in the CBD or in local suburban boutique office blocks.

Stability is what first comes to mind when thinking of this category of tenant.

Prices generally range from $300,000 for a small regional office to about $2 million for a larger office.

Dentists

Dentists are another essential service–type tenant.

The difference between a dentist and other types of allied medical ones is their fit-out. The cost of setting up a dentist can be upwards of $300,000, which means it’s very costly for a dentist to pack up and move.

Generally, they make a good living, so they’ll often remain at the same location for decades. Prices for a dentist can be as low as $750,000 for a small regional practice up to about $1.5 million for an average-sized metropolitan practice. It’s worth remembering that these tenants often come with lower yields.

However, they’re very stable, so investors are generally happy to accept this.

Real estate offices

These types of businesses make money from sales commissions and rent rolls.

They pick prominent retail/office locations where there is a signage opportunity, which is the main reason why you see many real estate agent offices in corner block locations with big glass windows displaying not only the properties they are selling or renting, but also their brand.

Prices generally range from $750,000 to $1.5 million. The leases vary widely, offering plenty of flexibility.

Bottle shops

Bottle shops can be resilient in both good and bad economic times, especially in a country like Australia, where people love a drink.

Typically, bottle shops will be part of a strong national company that holds the lease over the property. Leases are usually at least five years.

Bottle shops can be as cheap as $500,000 for small regional shopfronts all the way up to around $5 million for a metropolitan shop with drive-through facilities.

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