What is Weighted Average Lease Term, and Why Does it Matter?
Learn about this key metric for evaluating potential commercial real estate investments.
When you’re considering investing in a multi-tenant commercial property, one of the most important tools to pay attention to is the rent roll, which provides you with an overview of every tenant currently occupying the property and of their leases.
From a rent roll, you can then calculate the Weighted Average Lease Term (WALT). This metric plays a key role in underwriting and valuation, so in this article, we’ll provide an overview of what WALT measures and how it can guide your investing decisions.
What is Weighted Average Lease Term?
Weighted Average Lease Term essentially measures the average amount of time left for all a property’s current leases. Rather than a simple average, the WALT is “weighted,” because it takes into account the size of each tenant.
Why is Weighted Average Lease Term Important?
Weighted Average Lease Term can help you determine how much work you’ll need to do to lease the property, and when. A smaller WALT means that you’ll need to do more work to find new tenants, sooner.
Since leasing work can be quite time consuming — and expensive if you have trouble finding tenants and part of the property is left vacant for a period of time — this information should factor into the pros and cons of investing in a particular property.
What is a Good Weighted Average Lease Term?
At Excelsior Capital, the Weighted Average Lease Term is one of the key metrics we consider when evaluating a potential investment. We look for a WALT of at least three years, though this number will vary depending on the asset class.
Typically, flex industrial properties have a lower WALT, because many flex tenants rent a smaller amount of space, and term lengths are usually around 3 years.
When you compare this to a large, multi-tenant office building, it’s easy to understand why the office building would typically have a longer WALT. Large office tenants tend to sign longer leases, and many large office buildings have at least one tenant using a large amount of space.
Our team at Excelsior takes this distinction into account when looking for new investments. In particular, we look for a WALT of three years or more for flex assets, and a WALT of five years or more for office building assets.
Partner with an Expert Who Understands Commercial Real Estate
Weighted Average Lease Term is a relatively simple concept to grasp, but it’s just one tool of many that the experienced real estate investor will use to evaluate commercial properties.
This is why it’s so important to have a strong grasp of the commercial real estate space before you start investing, or to work with a partner who does.
At Excelsior Capital, we focus on investing in stable asset classes — like flex or light industrial buildings and medical office buildings — in healthy secondary markets. We’ve seen this strategy work time and time again, delivering strong returns for our investors.
If you’re interested in learning more about making a direct co-investment with Excelsior Capital, please fill out this brief form to get in touch with a member of our team.
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