How Commercial Leases Are Different To Residential Leases

When investors think about property, residential is often the first thing that comes to mind. But commercial and industrial property (including smaller storage units and microwarehouses) can operate quite differently.

That doesn’t make commercial property better or worse. It simply means investors need to understand a different set of fundamentals.

One of the most important differences is the lease.

In residential property, the lease is often relatively familiar and straightforward. In commercial property, the lease plays a much bigger role in shaping how the investment operates from the length of the tenancy and future rent increases through to who is responsible for certain property costs and how the premises can be used.

For investors, this can create some attractive benefits, including longer lease terms, greater visibility over future rental income and, depending on the lease structure, the ability to recover certain property outgoings from the tenant.

The key is understanding exactly what the lease says and how its terms affect the investment.

Here are some of the main differences investors should be aware of.

1. Lease Terms Can Be Longer

Residential leases are commonly structured around shorter fixed terms, such as 6 or 12 months. Commercial leases can provide greater certainty over a longer period. A common structure you may see is an initial 3-year lease with a further 3-year option, giving the tenant the opportunity to remain in the property for a longer period if they choose to exercise the option. The exact term and renewal options will depend on the property, tenant and negotiated lease.

2. Rent Reviews Are Built Into the Lease

With commercial property, the rent isn't necessarily fixed for the entire lease term. Commercial leases can include agreed rent reviews, such as annual percentage increases, consumer price index adjustments or market reviews at certain points in the lease or when an option is exercised. This means the potential rental income over the life of the lease needs to be considered alongside the initial rental return. The lease should clearly set out when and how the rent can change.

3. The Tenant May Contribute to Property Costs

Another important difference is outgoings. Depending on the lease structure, the tenant may contribute towards costs associated with the property, such as council rates, insurance, maintenance, utilities or other agreed expenses. The exact responsibilities vary depending on the lease, so investors need to understand what is included in the rent and what costs may be recoverable from the tenant.

4. The Property Has a Permitted Use

A residential property is generally leased as a home. A commercial property is leased for a specific business or commercial purpose. For a microwarehouse, for example, the permitted use may determine what type of business can operate from the premises. This makes the property's location, access, configuration and functionality important considerations when assessing tenant demand.

What Makes Storage & Microwarehouses Interesting?

Small-format commercial and industrial properties, such as storage units and microwarehouses, have become an increasingly accessible way for investors to explore commercial property.

These properties are typically designed for small businesses, trades, e-commerce operators, storage users and other commercial tenants who need practical space without committing to a large industrial facility.

Their versatility can also be a key advantage. By appealing to a broad range of potential tenants and uses, these smaller-format properties can provide an attractive entry point into commercial property without relying on one highly specialised type of occupier.

For investors, the important considerations go beyond simply looking at the rental return. Lease terms, tenant demand, outgoings, location, accessibility, vacancy, building functionality and the quality of the asset all form part of the bigger picture.

Thinking Beyond Residential?

Commercial property isn't right for every investor, and the lease structure is just one of many factors that need to be considered.

If you’d like to find out whether commercial properties could fit into your investment strategy, reach out to your friendly API Consultant or start with our Investor Quiz.

It takes just a few minutes and helps our team understand your goals, financial position and investment criteria. Once completed, you’ll have the option to book a complimentary consultation with an API Consultant to discuss suitable opportunities in more detail.