The Beyond Multifamily series is hosted by non-residential commercial real estate investor and Best Ever Show host, Ash Patel. Ash’s goal for this series is to introduce you to the world of non-residential commercial real estate investing and teach you how to look at and underwrite different commercial asset classes.
In this episode, Ash gives his Best Ever advice on how to fill vacancies in commercial real estate. He provides knowledge to help investors make educated decisions on what to buy, what to do if you have a vacancy, and how to fill it.
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TRANSCRIPT
Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and this is an episode of Beyond Multifamily, where we dive into topics other than multifamily investing. Today, we're going to dive into how to fill vacancies in commercial real estate. A lot of best ever listeners are scared about the retail apocalypse. Office buildings are decimated right now. What do I do if I have a property? Why would I even look at a property that's going to have a lot of vacancy? I'm going to give you the knowledge to help you make educated decisions on what to buy, what vacancies are good, and what to do if you have a vacancy, and how you fill it.
The first thing I'm going to tell you is there's no magic formula to fill vacancies. And often buying a building that has some vacancy built-in is a really great value-add approach to making a lot of money. But we're all going to encounter vacancies, whether you're residential, commercial. It's just a fact of business and real estate; you're going to have tenant turnover. I'm going to do my best again to educate you and give you all the tools you need to help you avoid and fill vacancies.
The first thing we're going to touch on is how to avoid unexpected vacancies. You've got to communicate as best you can with your tenants, find out the health of their business, find out what their future plans are. One of the greatest things in commercial real estate is when you have a tenant that outgrows your space. As much as it's difficult to lose a great tenant, it's great that maybe they rented an office building from you to start their business, or they moved from their home office into one of your office buildings, and now they've grown so much they've outgrown their space, they need to buy their own building, or they just need to rent a much larger space... It's a tough deal, but it's got to be satisfying knowing that you helped somebody build their business.
Two other ways you will encounter vacancies is if a tenant just stops paying, or slow pays, and eventually they stop paying and they can't continue to lease the space that they're in - that's a tough deal, and I've got to tell you, once a tenant slow pays - and again, probably similar to residential, once your tenant slow pays, it means they're having problems with their business. It's often the beginning of the end. So it's up to you to not fall for sob stories. "I'll make it up to you next month." You've got to be diligent; they're having problems either with their personal financial life, or their business just isn't doing as well as they anticipated. So you've got to stop the bleeding, figure out an exit plan. Often that exit is, "Hey, listen, I'll work with you; you've got to keep paying rent. I'll give you additional time to pay it, but let's look for a new tenant in the meantime. Both you and I will try to fill your space, and as soon as that vacancy is filled, you don't have to pay rent anymore. But until then, you owe me the rent, until we find a new tenant."
Another way that you have unexpected vacancy is just a tenant disappears on you. And again, if you can monitor the health of your tenants, you know this before it happens. If you have a retail tenant, and the shelves are bare, inventories not moving, their hours are a lot more curtailed than what they used to be, something's wrong; the writing's on the wall. You want to try to get ahead of that problem, before you lose months and months of revenue.
I think it's important to build those relationships with your tenants. If they're paying 4k, 5k, 7k, 10k, 15k a month to you, the least you can do is maybe quarterly check in on them. If they're local, if they're a restaurant, bring your family to dinner, bring your friends to dinner, have your business meetings at their place of business. So few landlords do this. and I can't tell you how much the tenants appreciate it... And they feel a sense of obligation to you; if they are having trouble with their business, if they plan on not renewing their lease, they'll usually be forthcoming with you, because you took that time to build a relationship.
You also want to use somebody else's vacancy to your advantage. We often look for properties, whether it's office, medical, retail, warehouse, that has some vacancy in it. The ideal scenario is if you can find a building that has anywhere from 30% to 50% vacancy, but the existing tenant or tenants can pay all of your expenses. Anything beyond that is just pure profit. So don't be afraid of buildings that are not fully leased.
I'm going to share some stories with you that will illustrate some of the mistakes that I've made, some of the lessons that I've learned. My very first property, mixed-use property, the store was fully leased on the first floor. The apartments on the second and third floor were completely vacant. Once I had those apartments renovated, I went out and bought a giant 10 foot by 5 foot banner sign, hung it on the side of this building. This was at a college town, so I expected a lot of college kids to start calling me, wanting to lease out these apartments. And for me, that was the ideal tenant, because the parents often cosign on the loans. Well, in this case, I found out that there's a seasonality to college kids renting apartments. The only phone calls that I received were for low-income housing, or just people that were barely making it. None of my college kids were applying, and I figured out that college kids pre-leased their apartments a semester ahead of time. So my apartments were done in August, I figured - right before the school year, perfect timing. Well, all these kids had signed their leases. January, February, March, for the following school year. I held out and lost a semester of revenue.
This doesn't just apply to college apartments. If there's retail businesses, restaurants in a college town, your best bet in getting a lease signed is so that the tenants could be set up for the start of the school year. Also, look at seasonal tourist towns, resort areas where maybe it's the winter season that they're packed for snow skiing, maybe it's the summer, they're packed for warm weather... Know if there's a seasonal component to filling vacancies.
One of the very next properties that I purchased was a 15,000 square foot vacant retail building. And I had no idea what I was going to do, how I was going to fill it; all I knew that I was going to work until I was able to get a tenant in there. It took me I want to say four or five months to find this tenant... And that was four or five months of pounding the pavement.
I took that same 10 by 5 banner sign, hung it on the front of this building. We had a great traffic count of about 45,000 cars per day; I would get some tire kickers. The problem with this property was I just didn't have enough parking for the amount of square foot that I had. So I made flyers. I walked around to neighboring businesses, gas stations, posted them everywhere that I could. I knocked on doors of all the other businesses in the area that had close to 15,000 square feet. I would find out what they're paying monthly in rent, and I told him I would beat it by a significant amount. I tried, I hustled, I pounded the pavement... I mailed a full color brochure to every residential and commercial realtor in the area, offering them a great commission if they can help me find a tenant. Finally, one day somebody called the phone number on the banner, and it was a tenant that was interested in the building. I was able to sign a five-year lease for a great tenant.
One of the things I want to tell you about is your banner signs - just go to a print shop or a banner company, get a giant sign made up... All you want is the words FOR LEASE and a phone number. But don't put the area code. You want to make the sign as easy to remember for somebody as you can possibly make it; let them assume that whatever area code you're in is the area code of your phone number. So very simple, giant letters, FOR LEASE, seven-digit phone number. You don't need all the extraneous verbiage, unless there's a lot of foot traffic that's going to see it.
What I mean by that is if you have a store window, where there's a lot of foot traffic, people walking by on their way to work, on their way to school, if it's a busy sidewalk, put a sign up with as much detail as you want. But if you're trying to capture people driving by, all you want is FOR LEASE, or the word AVAILABLE. If you don't know if you're trying to sell it or lease it, the generic word AVAILABLE will just have people inquire, "Hey, is this for lease? Is this for sale?" And again, a seven-digit phone number that most people will be able to remember.
One of my next purchases was an office building that had sat vacant for five years, and a lot of the inside wasn't even finished. I spent six months renovating or upgrading the interior, or really just finishing it, and now it was time to lease this building. What I didn't understand at the time was that it had five years of vacancy. For five years, this building was known as a building that sat vacant, with no life in it. I redid a lot of the landscaping, I added a ton of exterior light, so people would know that there's new life brought into this building. I put my magic banner up on the front of the building, and nothing. Weeks went by, nothing. I relied on that banner, and nothing was happening. So I knew I had to hustle even harder.
I went to city council meetings, let people know that there's offices available. I got on Facebook Marketplace, I got on Facebook, the town page for that area, let people know that there's office spaces available, and still no traction. I started second-guessing if I did the right thing. I just put a ton of money into this building, and nobody wanted to look at it, let alone lease it.
Back to creating the flyers, pounding the pavement... And that wasn't working either. As crazy as it sounds, I bought a little FOR RENT sign from Home Depot, the kind one would use for a residential listing, and I put it on the grass in between the sidewalk and the street, and all of a sudden we got a ton of phone calls.
People were so used to driving by this building for years and never taken a second look at it. And now, all of a sudden, because this FOR RENT sign was almost eye-level as they were driving, it caught the attention of a lot of people. I started getting phone calls inquiring about office space, and within a few months, this building was fully leased.
Almost 10 years have passed since that time, and anytime there's a vacancy in that building, it always gets filled from referrals, from other tenants. The reason why - it's a pretty intimate building; it's actually a 100% female-owned business tenant building, and anytime there's a vacancy, my tenants will give me referrals, because they want to control who their neighbors are. They want to make sure whoever is in this building vibes with them, or maybe complements their business, or maybe just on a personality level they fit with.
So one of your biggest referral sources, one of the best ways to fill vacancies, is use existing tenants, whether it's in a retail strip center, a medical building, office building, or a warehouse. People can be apprehensive about who their neighbors are going to be, so if at all they can control or help and determining who their neighbors going to be, they will.
Another great way to fill vacancies is not only Facebook Marketplace, which is an easy way to post whatever your vacancy is, but find the Facebook page for that town and the Facebook page where there's no restrictions on comments, people say whatever they want. That's the page where you find out the vibe of that town, where people talk about the crime, the schools, the politics. Get on there, the one that has the most number of followers and contributors, and let them know that you've got a vacancy at this restaurant spot, at this office building... And the people will want to, again, control what comes into their town, so if their favorite restaurant that they visit three towns over, they might go there the next time and say "Hey, I would love for you guys to expand to this location. It's right in our backyard." If they have a dog groomer that's looking to open a second location, an accountant that's looking to expand, a lawyer who's looking to add additional attorneys - they will make those recommendations for you.
Don't be afraid to offer a referral bonus for anybody that helps you fill a vacancy as well. Similar to that Facebook page that everybody congregates at, find out where in that town all the gossip is, where the people know everything about everything in that town. It could be the coffee shop or the local bar, where the bartender has been there for 25 years, and knows everything about that town.
I bought a strip mall in a small town years ago, and right after I purchased it, I started getting phone calls from a lady who owned a drive-thru convenience store/liquor store. And anytime there was a rumor, she would call me and say, "Hey, I heard there's a butcher or a meat shop coming into your store." I would have to squash the rumors or address them somehow... But very quickly, I found out that this was the lady that had her pulse on this town. She knew the gossip, she knew everybody. People would stop in there in the morning to get coffee on the way to work. After work, they'd stop they get their beer, cigarettes, light groceries... So she knew everybody and she had the vibe of that town. So when it came time to fill vacancies, that's the person I went to, and she did help me find a deli that then expanded into two other locations.
Craigslist is also a very underrated place where you can post vacancies for any kind of commercial real estate. I believe they're now paid ads, but it's a nominal charge.
Break: [00:16:38.26] to [00:18:25.11]
Ash Patel: Now, Best Ever listeners, there might be the obvious question, "Wait a minute, why don't you just enlist a broker?" And the answer to that is you often can, as long as the property makes sense. What does that mean? Early on in some of my smaller properties I would have brokers come down, and they would pick and choose... Like, in my office building, they would want the 5,000 square foot spaces, but the smaller offices that were 800-900 square feet, they didn't even want to bother marketing, because there was very little commission in it for them.
So if you enlist a commercial broker, you need to make sure that it's going to be worth their while. If they have so many properties, they're going to look at where their commission is the highest, and they're going to attack those properties first. Also, keep in mind, when you enlist the help of a broker, you're paying them commission whether you find the tenants or not. You may also be thinking "What if I've had preexisting conversations with a number of different business owners, and they were potentials? Can I exclude that from your commission?" The answer from a good broker is going to be no, because if they know the property is now being professionally marketed by a top broker, it may encourage them to sign that lease before somebody else does. So the broker is going to say "It's because of me, it's because of the marketing." And again, if it's a great broker, pay him their commission and they'll make it up to you on the next one.
We all know how brokers get paid on sale, typically the 6% split. However, on leases, it's very similar. It's 6% of the life of the lease. So if you sign a five year lease, that over five years the tenant is going to pay you $300,000, you now owe the brokers 6% of that, which comes out to $18,000. This may help you understand why brokers don't want to take on a 500 square foot office space, because typically the lease on that could be one to three years, and how much is that rent possibly going to be? And then how much is 6% of that rent possibly going to be?
Figure out which broker is right for which property. If you have an outlot at one of your strip malls, find the broker that specializes in outlots. If you're trying to fill a restaurant vacancy, get on LinkedIn, find out who the rockstar broker is that's filling all the restaurants. If you don't have any luck on LinkedIn, find out the last 10 trendy restaurants that have opened and find out who the broker was on that deal.
If you're looking to fill a national tenant into a larger space, go to where your Costco, your BestBuy, or your Whole Foods is, and find out if there's availability, which brokers' names are on the signs, interview the broker, find out which tenants they think would be best for your space, what rate they'd be willing to pay, and make them earn your business.
If you have a broker that just blanket says, "Yes, I'll take the listing." "Hey, I've got this property. Do you want to list it?" "Yes." Not good. You want the broker that wants to find out more about your property before they decide if they want to list it.
I'll give you an example... I had a vacant restaurant, and I found that rockstar broker that was bringing all the high-profile restaurants from out of state into Cincinnati. I called him and said, "Hey, I've got this great building. Would you be willing to take this on?" This broker reluctantly said, "Listen, I would absolutely love to take on this listing, but it wouldn't be fair to you because I don't have the appropriate staff at the time to devote to this project." I was absolutely blown away. Can you imagine a residential realtor saying, "Hey, listen, I don't want your listing, because I've got too many, and I can't spend the attention that your house deserves."
You want to make sure that broker is upfront about any fees or costs that you're gonna have to cover. The very first time I hired a broker to either sell or lease my building, it was a rough learning experience. I signed a contract for six months for this company to, again, either sell or lease my building. I thought I did my homework. They sold me on what I wanted to hear. They said, "Hey, listen, we're going to pick up the phone. We're going to call expiring leases. We're just going to pound the pavement." They were going to do all the things that I was going to do, but I thought I made it big time. It was beyond me. I can outsource this. So a little bit of that ego came in. And I hired them... As soon as I signed that contract, they called me up and said, "Hey, we've got to put a sign out front." "Awesome. Go put a sign out front." "Well, no, you've got to pay for it." "Alright, fine. I think you guys are the best. How much is it?" "$1,700." It was a professionally made sign, four by four post, giant four by eight plywood, with their company logo, their phone number, and no information about this building. So I wasn't happy about that, because this is a sign that they can continuously reuse, and they didn't advertise my building, they advertised themselves.
This got a lot worse... I then had to pay several thousand dollars for a list of expiring leases, that they were then going to cold-call. Long story short, they had this listing for six months, and again, either for sale or lease... And they were not able to get very many showings. They had no traction. As soon as that six-month contract was over, I put this property on Craigslist, and probably 15 different markets. I'm in Cincinnati, and the person that called me was from a Craigslist listing in Detroit. He had family in Cincinnati, he wanted to move down here, and he was looking for property, he was just browsing Craigslist... Ended up buying this building just a few months later for me. So all of that effort that these brokers put in, all of the time spent on the phone - why didn't they just put an ad on Craigslist?
I give you that example because even if you have brokers involved, do the Craigslist ads and ask the brokers if they plan on doing that. If they don't, if it's beyond them, above them, whatever it is, do it yourself, pay the few dollars, and just help them. You have a common goal in trying to fill your vacancy, so work with your broker.
I will tell you, after several more times of using brokers, good brokers will not charge you for their marketing materials. They will charge you if you need plans or renditions for your space. They'll charge you for anything that you can reuse. But often, they'll just give you recommendations of architects or artists or designers that can do what you need, and you own all of the work that you paid.
A couple other ways to fill vacancies is find out if that area has an economic development committee, either at the municipal level or the county level; find out if there's a chamber of commerce, again, at the municipal level or the county level, and enlist their help in trying to fill that vacancy. Before new businesses often come into an area, they'll ask the Chamber of Commerce, the Economic Development Port Authority even, if there's any grants available, if there's any locations that they should be at; they'll find out demographics, household income, or any other information that can help them make a good decision.
Finally, look to property management companies. Here's the deal... There's a ton of property management companies for both residential and commercial. Obviously, you want a property management company that has commercial real estate if you're trying to fill commercial tenants, and you want to find out their track record. Find out if they have strip malls, or office buildings, or warehouses, or industrial properties near where you're trying to fill a vacancy, and find out what vacancies they filled recently. Good property management companies can be an absolute key to filling vacancies. And if they're that good at filling your vacancy, why not consider using them to actually manage your property?
Some of the hardest vacancies to fill is when you want a national tenant in your space. How do you do that? How do you land a Starbucks, a Whole Foods, a Walgreens? The answer is you need the relationships and you also need the hustle. The real estate people for those big box stores or those national tenants are very guarded. They get hit up all the time; you've got to approach them the right way.
I had a 30,000 square foot vacancy, and there's only so many 30,000 square foot stores out there, one of which was Bargain Hunt. This was a store that my sister-in-law told me about. It's an addictive store where prices just keep coming down, until product sell. She was absolutely in love with that store. So I tried to find out who was in charge of their real estate. Through LinkedIn, I found the regional person responsible for Bargain Hunt in my area. So I hit him up on LinkedIn several times, no traction; they must get bombarded on LinkedIn. So I got them on Facebook, I friended them on Facebook, and I sent them repetitive messages. "Hey, I have this incredible location. Very brief. this is the traffic count, this is the square footage", whatever the neighboring tenants were, and didn't hear back. And I kept at it. I was persistent. About once a week, I would hit him up and say, "Hey, listen, I will make you an absolutely killer deal if you consider this area", and finally they wrote me back and said, "Listen, I appreciate it, but we're not expanding in Ohio anymore. We're only looking at Kentucky and Virginia."
The point is, I got their attention. I have this contact for the future. If you have an outlot, which is basically a piece of your parking lot that you're going to carve out and you want a Starbucks there, find out the broker who landed the last Starbucks. You can also go to each of these companies' websites, and they often have a real estate division where you can submit all the things that they require - traffic counts, site plans, neighboring tenants, closest competition; whatever it is, it's a process. It doesn't go quickly, but once you land a national tenant on a 10-year lease, you've made seven figures often.
Best Ever listeners, hopefully you've taken a lot of my advice over the last year or so, and you know how big I am on networking. If you are in commercial real estate, you should have a network of other commercial real estate investors, landlords; hit them up, find out if they have any contacts that can help fill your vacancies. You also want to play on the competitive nature of franchises.
Best Ever listeners, I'll leave you with one more tip on how to fill vacancies, and that is play to the competitive nature of franchises. A while back I helped a friend of mine fill a vacancy. He had a building that was perfect for a fast food franchise, and it was nestled right next to a McDonald's, a Burger King, a Papa John's, a KFC and a Taco Bell. All you had to do was send out a flyer saying "Here's my neighbors, here's my square footage", and very easily he was able to land a Popeye's Chicken there.
Any franchisee will know if there's a McDonald's or Burger King, a KFC, a Taco Bell, all of those franchisees have already done their homework. Obviously, the demographics, the population, the traffic count met their criteria... So if it's good enough for McDonald's and Burger King and Taco Bell, it's got to be good enough for us.
That's a wrap, Best Ever listeners. I hope I took some of the fear out of buying buildings that have some vacancy, or if you have a vacancy, be patient, work, grind, canvas, pound the pavement, enlist brokers, all hands on deck until you fill that vacancy, but it's not the end of the world. Don't be so fearful that it keeps you from doing commercial deals.
What I've learned from my own experiences is I often panic when I hear that there's going to be a vacancy, and if I am patient, I make good decisions. If I act on impulse, and hire the first person that comes along because I'm scared that another vacancy will pop up, I make bad decisions. So please, be patient when you have a vacancy, make the right decisions... And Best Ever listeners, if you got value out of this, if you're enjoying the Beyond Multifamily series, please email me. Let us know what else you want us to cover in terms of Beyond Multifamily topics. My email address is ashbpatel [at] gmail.com. Let me know what aspects of commercial real estate you'd like me to cover. And finally, thank you again, Best Ever listeners. If you enjoyed this episode, please leave us a five star review, share this episode with somebody you think can benefit from it, don't forget to follow, subscribe and have a best ever day!
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