Commercial Property. Explained. | A CBRE Private Wealth series

By Ingrid Filmer
Senior Managing Director, Capital Markets – Private Wealth, CBRE

If you are looking at a multi-tenanted commercial property, one of the terms you will hear very quickly is WALE.

WALE stands for Weighted Average Lease Expiry. In simple terms, it is a way of taking all the different lease expiry dates in a property and turning them into one average measure.

If you have five tenants, one lease might expire in two years, another in three, another in five and another in six. A WALE gives you an averaged view of how long the income from that property is contracted for.

But there is one thing I would tell any new commercial property investor straight away:

Do not stop at the WALE number.

WALE is an average. It is useful, but it can also hide a lot of important detail.

A property might have a six-year WALE, which sounds very secure. But when you look under the hood, you might discover that one large tenant has 12 years left on its lease while several smaller tenants are expiring over the next 12 to 24 months.

That is a very different risk profile from a property where most tenants have five or six years left.

So WALE is a useful starting point, not the conclusion.

What can WALE actually be weighted by?
WALE can be presented in different ways.

You may see it calculated by remaining lease term. You may see it weighted by rental income, by floor area or by another measure such as rent per square metre. You may also see a lease expiry profile presented as a graph showing how much income or space expires in each year.

The calculation itself is not the most important thing for a new investor.

The important question is: what is this WALE telling me about the property? If it is weighted by rent, it can show you when different portions of the property’s income are at risk of expiry.

If it is weighted by area, it can show you when different portions of the building may become available.

And if you simply look at the expiry dates themselves, you can understand whether there is a concentration of lease events in one year or whether they are spread over time.

Each view tells you something slightly different.

Why do investors care about WALE?
There are three reasons I think WALE matters: income security, risk management and opportunity.

For an investor looking for long-term passive income, a longer WALE may be attractive because more of the rent is contractually secured for a longer period.

That can reduce the immediate risk of having to replace tenants, fund incentives, suffer vacancy or renegotiate rents.

Banks and valuers also want to understand how secure the property’s income is. They are interested in when rent is expiring, which tenants are responsible for that rent and how likely that income is to continue.

But a long WALE is not automatically better.

Likewise, a short WALE is not automatically worse.

This is where investors need to think about what they actually want the property to do.

A short WALE can be an opportunity
Imagine a multi-tenanted property where several leases expire in the next two years.

At first glance, that may look risky.

But what if those tenants are paying rents well below current market levels?

Those lease expiries may give you the opportunity to reset rents closer to market levels and increase the income from the property.

Or perhaps you want to change the tenant mix.

You might own two smaller shops next to each other and believe the property would perform better if those tenancies were combined into one larger space and leased to a stronger tenant.

In that case, having the two leases expire at a similar time may be useful.

The same thing applies if your long-term plan is redevelopment.

If you are buying a property because you ultimately want control of the whole site, you need to understand exactly when you can obtain vacant possession or control of the relevant parts of the property.

A long WALE might actually work against that strategy.

That is why the question should never simply be, “Is the WALE long?’

The better question is, “Does the lease expiry profile suit my investment strategy?’

Sometimes you want expiries aligned. Sometimes you do not.
There are good reasons to deliberately align lease expiries and good reasons to deliberately keep them apart.

If you have two adjoining tenancies and may want to combine them in the future, having the leases expire at around the same time can create flexibility.

On the other hand, if you own a property with many tenants and your objective is stable, passive income, you may not want half the rent expiring in the same year.

If multiple tenants leave at once, you may have a significant leasing task, multiple incentives, fit-out costs and a temporary reduction in income.

Spreading lease expiries can therefore be a de-risking measure.

You might have an anchor tenant where you want the longest possible lease because that tenant underpins the property. But with the smaller tenants, you may prefer shorter or staggered terms so you can keep improving the retail or tenancy mix over time.

The ideal expiry profile depends on the property and your strategy.

Options are not a guarantee
Another mistake investors make is assuming that an option is the same as having a firm lease term.

It is not.

An option generally gives the tenant a right to extend the lease if the conditions for exercising it are met. It does not guarantee that the tenant will exercise it.

You should never bank on an option as though the tenant has already committed to stay.

That does not mean options are irrelevant.

If you have a good handle on the property, a capable property manager and strong tenant communication, you should have a reasonable awareness of whether a tenant is likely to stay, whether they are trading well, what rent they are paying and what a realistic market rent may be if an option is exercised.

That is simply good management.

I think of it as hygienic file management.

You should be looking forward, not reacting when the expiry date suddenly arrives.

For every tenant, you should know the lease expiry, the option dates, the rent review dates, the current rent, the likely market rent and who a realistic successor tenant might be if that tenant leaves.
A WALE might summarise your lease expiry risk, but good asset management is what protects the underlying value.

Look under the hood
The biggest mistake I see is investors treating WALE as though it tells the whole story.

A long WALE can still contain risk.

It may be supported by one very long lease and several short leases. It may contain rents that are above market, making replacement difficult if tenants leave. It may include tenants whose future space requirements are changing. Or it may tie up a property for years when your real objective is to redevelop.

A short WALE can also contain opportunity.

It may give you access to under-rented space. It may allow you to reposition a tenancy mix. It may give you flexibility to combine or subdivide areas. It may bring forward the point at which you can take control of part or all of a site.

The average is just the average.

You need to know what sits underneath it.

What should you ask for?
When I look at a multi-tenanted property, I would want more than a single WALE figure.

I would want the full tenancy schedule.

I would want to know every lease expiry date, every option, the rent paid by each tenant, how much area each tenant occupies and when the rent reviews occur.

I would want to see a lease expiry profile showing how much rent is exposed in each year.

I would also want to understand which tenants are critical to the property and which tenancies create future flexibility.

Then I would ask a more strategic question:

What do I want this property to look like in five or ten years?

If you want passive income, you may favour longer and well-spread lease security.

If you want rental growth, some shorter leases may be valuable.

If you want redevelopment or control of the site, you need a clear path to vacant possession.

If you want to improve the tenancy mix, you need to know where your future leasing opportunities sit.

There is no single “good’ WALE.

There is only a lease expiry profile that either supports or conflicts with your investment plan.

That is why WALE matters.

Not because it gives you one neat number, but because it forces you to understand when your income is secure, when it is exposed and where your future opportunities may sit.

So when an agent tells you the property has a five-year or seven-year WALE, do not stop there.

Ask for the tenancy schedule.

Look at the expiry graph.

Check the options.

Understand how much rent and space expire each year.

And most importantly, decide whether that timing suits what you are trying to achieve with the property.

A WALE is useful.

But the real value is in looking under the hood.

Commercial property does not need to feel too hard. Follow the series and let’s demystify it together.