As property management experts in California, we talk a lot about rent control. It’s an important topic, especially for residential rental properties, where the laws are strict and compliance can be challenging for investors who don’t understand every nuance of state and local laws. For example, Los Angeles has well-defined rent control laws for residential properties under their Rent Stabilization Ordinance (RSO), and even rental homes in LA that don’t fall under that law might still be subject to the statewide rent control law established by The Tenant Protection Act.
Commercial spaces in California such as office buildings or retail locations are not typically subject to the same formal rent control laws.
That doesn’t mean there aren’t emerging discussions around rent stabilization and it doesn’t mean that residential rent control doesn’t impact marketing pricing around commercial property.
Let’s dive into rents, rent control, and how a commercial real estate investor in California can protect their rentals and continue to be profitable in a market that’s governed by laws and best practices that aren’t always easy to follow.
Rent Stabilization and California Commercial Spaces
In California, commercial landlords are free to set and adjust rental rates based on market conditions and other factors. There’s no legally mandated limit to how much a commercial owner charges for a tenant to rent their property, and there’s no cap on how much the rent can be raised when it’s time to re-negotiate the lease or offer a lease renewal.
California tends to lead the way when it comes to tenant protections of any kind, so if there’s going to be a market that introduces rent control to commercial properties, this is likely where it would happen first. There has been some support for rent stabilization in certain commercial spaces, especially because of the current economic squeeze that many small businesses are experiencing. From inflation to competition, there have been a number of financial challenges for small businesses, and a lot of commercial tenants may be struggling to meet rental obligations while remaining profitable.
Smart commercial property investors have better options than self-imposed rent control. Let’s take a look at some of those.
Long-Term Lease Agreements for Commercial Property in California
Residential lease agreements come with a lot of requirements in order to remain legally enforceable and compliant. Commercial leases can be more flexible.
To mitigate the risks of sudden rent hikes or market fluctuations, a lot of commercial tenants may be looking for long-term leases with built-in rent escalation clauses. This is something that commercial landlords should consider, because it could benefit them, too. There’s more stability; a property owner knows that their tenants will be in place longer, and income is more predictable.
Commercial tenants have a lot to gain from a long-term lease, too. There’s less concern that rent will suddenly become unaffordable or they’ll have to move their entire business operation somewhere else.
This does not have to mean that rent will never increase. It’s possible to sign a 10-year commercial lease with a steady schedule of rising rents year over year. That keeps the property profitable for owners and allows commercial tenants to plan on how they’ll meet the higher rents as the lease progresses.
Protecting Small Businesses: How Los Angeles is Modeling Reasonable Rents
The city of Los Angeles has been trying to protect small business owners who are finding it unrealistic to rent any commercial spaces. While the measures adopted by Los Angeles are hardly traditional rent control and could not be called a stabilization program, business owners can find support through the measures that are currently in place. Businesses in more vulnerable industries such as retail, food services, and entertainment have additional resources to call upon.
Recently, there has been support for any laws or requirements that might protect small businesses from excessive rent hikes that could force them out of prime locations.
State lawmakers in California have also been considering laws that would shield small businesses from sudden evictions, evictions that come with short notice, or excessive fees that would make it difficult for them to stay in the properties they’re renting. Right now, commercial leases can be ended with just 30 days of notice.
Also on the state level, there’s been discussion about how much notice a commercial property owner should have to give before raising the rent on a commercial tenant. SB 1103 has been through discussions and amendments, and this is a law requiring landlords to provide at least 60 days’ notice before any rent increase, even on a month-to-month lease. Many advocates see this as a law that would bring welcome relief to small business commercial tenants.
Setting Rent According to California’s Commercial Markets
It comes down to competition.
Rent control can feel good to those small businesses who are worried about paying the rent that the landlords demand, but the market and the competition act as rent control on their own. Overcharging for commercial space means an owner is unlikely to find a tenant. That property will be vacant and unprofitable.
As we have been saying, commercial property rentals are unique compared to residential properties. Tenants are businesses dependent on a steady cash flow, so they’re sensitive to pricing. A well-researched rent price can make a commercial property especially attractive to these potential tenants without undercutting the desired earnings of an owner. Proper pricing is also crucial for maintaining long-term tenant relationships and keeping properties competitive.
Research the local market, analyze comparative properties, and determine what makes one property more desirable than another. While rent control may not drive the ultimate price that’s set, market competition certainly will.
Small businesses can make excellent commercial tenants. But in markets like Los Angeles, those small business owners can struggle with high commercial rents. This is especially true in popular districts where there’s a lot of foot traffic and the potential for higher earnings. Landlords who offer favorable leasing terms and stable rent amounts are likely to attract and retain those small business tenants. This contributes to a more dynamic commercial property market. It also provides steady income to owners who want to be able to predict what their own profits and losses are likely to be in a given year.
Study the market data that’s available. We can provide good data and sharp analytics, so contact us at Bell Properties Commercial Real Estate. We can offer information on rent levels in specific areas, vacancy rates, and tenant demand. This information is especially critical for Los Angeles commercial property owners who want to position their assets strategically. We can use our market data to inform lease pricing. This will help landlords stay competitive and negotiate from a stronger starting position.
Tenant Quality Counts in Commercial Properties
Place good tenants who can be counted on to pay the rent on time and treat the property well.
Tenant screening is a common practice for both residential and commercial rental properties. It’s important to evaluate the financial health of a tenant before you sign a lease. For commercial owners, it’s also important to understand the stability of a business before moving them into a commercial space. Owners are taking on risk by renting to commercial tenants, just like they do when renting out a home.
With a lot of small businesses struggling and a lot of economic uncertainty in the pricier markets around California, landlords may want to be more cautious in their tenant selection. Take a close look at rental references. Are former owners willing to state that they were good tenants, who paid on time?
If there’s a tenant that seems uncertain or highly dependent on specific market conditions, a shorter lease term may be in order. This will protect the property owner from being stuck with an unreliable tenant for the long term. The short term lease can come with an option to renew.
A commercial tenant’s creditworthiness should be important when selecting renters. Study their financials before handing over the keys to your property.
Establishing Commercial Property Identities
With rent control not yet the law of California’s commercial real estate market, property owners want to be known as the landlords who are fair and reasonable but also successful. No one wants to be known as renting out space in the low-rent district. Branding properties as highly desirable but also good values is the best way to attract good commercial tenants.
Offer unique features and services. Be flexible with responsibilities and requirements. In a competitive commercial market, properties that offer additional features and amenities will do well. Think about sustainable building certifications, which will be especially attractive to eco-conscious renters. Modern amenities like smart technology and updated security can help attract commercial tenants.
Let’s talk about where rent should land for a commercial property in Los Angeles or anywhere around California. While urban centers were once the only place that commercial activity could really be found, there are new markets outside of city centers that also offer affordable rents and ideal spaces.
Contact us at Bell Properties Commercial Real Estate. We can help you succeed with your investments.
