A landlord’s guide to maximizing the 0% vacancy market

Now is the time to improve your building — and your tenant mix

A tight market doesn’t mean a landlord’s hands are tied. In fact, it’s just the opposite. Hawaii’s unprecedented, ultra-low industrial vacancy rate puts landlords in the best possible position to upgrade their properties and their tenant mix. 

Commanding the highest rent

Price is paramount for most landlords. The goal is to get the highest rental returns with the least amount of hassle or risk — you’re looking for tenants with good credit and a great business outlook. 

To secure top-of-the-market rental rates, it’s essential to know about recent deals and comparable rates so you’ll have a realistic expectation of how far you can push the market on rents. 

Renewals are key to setting higher prices within your multi-tenant space. Renew tenants in your best spaces, such as a corner unit or a space with the best tenant improvements. Renewals set the bar, then new leases will follow at higher prices, because the past deal will justify future deal values.

Targeting the best tenants

Landlords should pay particular attention to industries that are forecasted to do well in the next three to five years. Stay away from the trendy stuff. For example, when Covid first hit, it seemed that everyone was in fitness mode. Many people opened their own gyms … but is there enough demand to sustain all of those new businesses? We suspect that the surge in small gyms was driven by a one-off event, rather than an overall (and lasting) change. 

Rather than chasing trends, chase credit. If you can land a national brand, that’s great, but also consider tenants on the next tier. Long-lasting local business, such as those with twenty-plus years of local operations and at least a handful of full-time employees, also tend to be great occupiers. 

We recommend key industries including construction, distribution, materials providers to the construction industry such as supply wholesalers, food packaging, and distribution including third-party logistics (3PL) providers. 

Restacking building plans

Most landlords think of a tenant’s decision to renew in their space as a slam dunk. No moving in and out, no empty building for some time period, and likely few tenant improvements, as the business was already able to operate with the configuration it had. 

But before you renew — take a moment. 

Take a look at the tenants who are really successful in your project. These are the low-hassle, good-credit businesses that you want to be absolutely certain you can renew. If they’re a flourishing business that needs room to grow, you could accidentally force them to move when their lease expires if you’ve already leased out other viable space. 

Before you renew small tenants, we recommend you spend time connecting with your best tenants. Do they need expansion space? More room for storage or parking? Are they happy with their tenant neighbors? Asking these questions can help you ensure you aren’t potentially putting them at risk. 

You don’t want a great tenant who plans for expansion to be forced out because you’ve already committed to another lease. 

De-risking investment in building upgrades

It might seem counter-intuitive: Why would a landlord consider making major building improvements now, when they could probably sign a tenant immediately simply because there are few (or no) competitive alternatives to serve that tenant’s needs? 

We’ve found that investing now in upgrades will reap greater benefits than waiting for the market to slow down. You’ll be better able to justify the cost of the changes because high market demand will most likely still be in effect when the improvements are complete. 

“You don’t want to spend heavily on building enhancements in a down market, when there’s a potential for it to sit vacant,” said Alika Cosner, Senior Vice President at Colliers International and Hawaii’s leading industrial real estate broker. “If you need to have a space go dark so you can do capital improvements, you do it now, because you know you’ll be able to fill it up quickly afterward.”

Cosner noted that landlords will have an easier time getting approvals for construction loans because a high rate of occupancy has the effect of de-risking the loans. Additionally, in slower markets, rents aren’t at their peak, so it’s harder to pencil out a return on investment for improvements.

Restacking buildings for a better tenant mix and less risk

“A big part of our strategy conversation with landlords in 2024 is thinking about how they can upgrade their tenant mix,” Cosner added. “Don’t just look at a vacancy and fill it. Look at available space and find the best tenant you possibly can. Attracting top-tier tenants with excellent credit might require some capital expenditures in the short term, but this will pay long-term dividends in the form of reliable, top-of-the-market rental income.”

Cosner and his team partner with landlords to analyze their rent rolls. The goal is to take advantage of the opportunity to stagger lease expirations. This can help minimize exposure, which is the period between lease terms where one lease’s expiration might not align with the next tenant’s occupancy, resulting in lost revenue.

Cosner advises landlords to carefully consider whether they should renew a tenant if they don’t meet the landlord’s big-picture investment criteria. While most landlords assume a renewal is their best option, that’s not always the case. 

“Now is a great time to address problematic tenants and those who aren’t a good fit in terms of lease compliance,” Cosner said. “You can restack your portfolio to reduce future exposure, accelerate rental rates, and secure a longer-lasting and more hassle-free tenant in the space.”

Cosner’s team now offers the 2024 Industrial Forecast — an in-depth look at Hawaii industrial markets and strategies to capitalize on emerging market trends. To request your free copy, contact ADDRESS@colliers.com.