Improving the value of commercial properties is a common goal of property management companies, real estate investment trusts, and independent building owners alike. These properties are an investment that should pay off for many years to come.
The incentive behind commercial property acquisition is typically based on the potential to improve the capitalization rate (cap rate). The cap rate is the yearly gross income generated by the property minus operating expenses divided by the purchase price. This metric is used to determine the relative value of properties and is an important purchase price driver.
It’s a formula that sounds simple enough, but as with most assets, you can’t just expect income to flow indefinitely without effort. Neglecting investments in efficiency upgrades of commercial properties will cause them to decline in value relative to similar properties and reduce the amount that tenants are willing to pay for use of the space, thus further lowering the cap rate and your profit potential.
“Abundant natural light and fresh air contribute enormously to human wellness and productivity. We’re only beginning to understand how much. I believe the future of workspace will be all about optimizing light and air.” Michael Emory, President & CEO, Allied REIT, 2015 Report to Unitholders.
Here are simple ways to improve the value of your commercial property and ensure its profitability for years to come.
LED Lighting Upgrades
Energy costs are a substantial amount of a company’s monthly expenses. If your property has an outdated lighting system, the higher operating costs could cause potential tenants to pass on renting the space in favour of one with lower operating costs. Conversely, having a more efficient building opens the opportunity to increase rents relative to less efficient spaces. Higher rents and lower operating costs lead to higher cap rates which leads to higher property values.
LED lighting is remarkably more efficient and reliable than previous lighting technologies. (restablish the site link here) In addition to lower hydro costs, LED lighting delivers higher quality lighting that requires much less time and expense devoted to maintenance. These factors also contribute to improving the cap rate by making the space more attractive to potential tenants and further lowering operating expenses.
High Efficiency HVAC Systems
This thinking also applies to the facility’s HVAC systems, which are typically the building owners’ responsibility to maintain. Just like lighting, HVAC systems have a significant operating cost and faulty HVAC systems have a negative impact on tenants, their employees and their customers.
Instead of simply performing band-aid repairs on HVAC equipment to stop tenant complaints, a more effective use of capital is to invest in efficiency and control upgrades to assets that have years of service life remaining or in replacing outdated, failing equipment with modern, efficient HVAC systems and controls. An energy efficient system that provides more control over comfort and air quality increases the appeal of the space and therefore the cap rate.
Additional Appeal for Certain Tenants
The more comfortable and efficient a commercial property is, the greater the pool of potential tenants available. The most desirable tenants run successful companies that specialize in high value products or services and they won’t set up shop in facilities that don’t fit the image they project. A fresh, up-to-date space presents an appealing choice for these organizations and having such tenants is a huge asset: they are likely to stay for an extended period and are willing to pay higher rents. Some may even wish to work with you on other improvements that could further enhance the property’s appeal and therefore value.