The cost of everything continues to rise. Most people who live in California are well aware of this fact as the cost of everything from groceries to real estate keeps going up. When it comes to owning commercial rental property, a landlord may struggle with the rising costs of construction.
Tenant improvements are often a part of commercial lease agreements here in California as they are across the country. While this may attract a certain tenant, it could end up costing more than the property owner may receive in rental payments. Construction materials and labor do not come cheap, and it appears that rents are not enough to make improvements as profitable as a landlord would like.
While it may seem as though the simple answer is to raise rents in order to recoup the costs of tenant improvements faster, that could price a certain rental property out of the market. Other property owners are willing to take the hit and get back those costs over a longer period. Prospective tenant may shy away from the higher rent property in order to save money on rent.
The competition among property owners here in California and elsewhere has not gone unnoticed by potential commercial tenants. They can see the market trends and may quickly understand they are in the better position when it comes to renting space. They can demand tenant improvements that could cost a landlord a certain percentage of profits, and that property owner may not have much choice but to comply. Otherwise, a property could remain empty, which tends to hurt the bottom line more than taking longer to recover the cost of tenant improvements. A landlord needs to work smarter in order to overcome this, which may require more aggressive lease negotiations than they are used to.
