The PROPERTY DOCTORS, Sydney Australia Novak Properties
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The PROPERTY DOCTORS, Sydney Australia Novak Properties
EP. 1283 COLD SHELL VS WARM SHELL: WHAT TENANTS REALLY PAY FOR COMMERCIAL SPACES
What if you could drastically cut initial expenses or completely customize your commercial space to your heart's content? Tune in as we sit down with Professor Novak, a commercial real estate veteran boasting over three decades of experience. He demystifies the critical differences between cold shells and warm shells, providing tenants with invaluable insights for making informed leasing decisions. Discover how cold shells offer a "blank canvas" approach, ideal for those who want full control over their space, versus warm shells that come with some built-in amenities, allowing for a quicker, more cost-effective move-in. We also explore the financial and logistical considerations for both tenants and landlords, making this a must-listen for anyone about to sign a lease.
Switching gears, we take a vibrant detour into the world of social media engagement with a special shoutout to our international listeners. Join us as we highlight Leo from Napoli, affectionately known as the Italian Stallion, and emphasize the importance of asking the right questions in today's complex world. It's all about breaking away from confusion and finding clarity. We wrap up with heartfelt gratitude and well-wishes, hoping everyone enjoys a fantastic Tuesday. Don't miss this episode filled with expert advice and practical tips that blend seamlessly into real-world applications.
A cold shell versus a warm shell. Here is the biggest difference for commercial properties, particularly when you're a tenant moving in. This is something you need to know. Can't get it wrong. I'm the ringleader, so let's go. Good morning, professor, good morning. Hey. How are ya Really good, professor Novak, commercial real estate agent. How long? 30 years.
Speaker 2:Yeah, like 32 years as an agent now 32, 32. So you've seen a lot of this stuff. It's too long, it's too long. It's good, though, like there's um, there's just so much happening, and I think commercial something where it's less transactional and people aren't necessarily exposed to it as much, so you can sit in a room and someone hasn't said it got that commercial lease experience. So, billy, you wanted to bring this day today to talk about fit outs on commercial properties.
Speaker 1:I haven't done one for the record, armed. I think if I was a tenant or wanting to start my own business, this would be the biggest thing that would make me nervous. You know, signing a lease, whether it be residential or commercial, is a big deal. Then you've got to worry about, you know, your first sort of couple of months getting into a profit and then you've got to worry about, you know, fitting out this new space you've taken on to work for your business and there's quite a big difference.
Speaker 2:Whilst you're doing that, it's reno. You're not making any money out of your business and you're paying rent.
Speaker 1:Yeah, so there is a big difference. What is a cold shell versus a warm shell?
Speaker 2:first of all, yeah, so cold shell, warm shell is the I guess you could say the level of fit-out done to the property. So a cold shell is more suited to tenants. It's that they want to have their own character. They're happy to spend money on the fit-out. Their branding is almost the fit-out as well. So you know, you'll see, like a Vodafone store or a Telstra store will take stuff as a cold shell. You'll see, westfields will, for instance, will rip out. You probably always get People, probably always get surprised with the level of ripout or the level of deconstruction. Um, when they, when they see a shop close in a Westfields, for example, you'd look at they go, that was such a beautiful fit out, none of it's being reused, it's all being thrown out and they take it back to a cold shell. So it's concrete, concrete floor, generally concrete ceiling sorry, concrete walls. Not really got much love for any gyprock, paint, carpet, kitchenettes, bathrooms. They'll just shell out the whole place. That is called the cold shell.
Speaker 1:So what's more attractive for a business like that? Some tenants are coming to you. If, like if, you're a landlord positioning your property to come to market, what do you? What's the best thing to do? Or two different sort of tenants?
Speaker 2:one's going to prefer each for their own reasons yeah, there are different types of tenants and I do have to say, um, if you're walking through a, um, it's a bit it's. If you're walking through a, it's a bit like walking through a morgue. When you go through a tenancy that's still there and they've literally sometimes walked out, left it in a bad condition. So sometimes we're selling stuff that it's just such bad, like it confuses people and it throws people off, whereas a good, old-fashioned cold shell is like it's almost there's a level of freshness to it and it lets your imagination go wild. Yeah, but yeah, they are.
Speaker 2:You know the amount of money you've got to spend on a cold shell versus a warm shell, like it's a different type of tenant. They do have to be cashed, they do have to have particular systems in in place for um, cash flowing, uh, upfront expenditure, people ready for a fit out. So, yeah, you, you will see that, um, the the higher value tenants are sitting with are more often comfortable with cold shells. Like 398 people to road in Balgala building was just built and there's one, two, three shops on the ground floor. We found tenancies for all the shops and everyone's ready just to tuck in and get, get there, and they've all signed nice long leases and everyone's ready to go and tuck in and do a beautiful reno on just it's just concrete as it is.
Speaker 1:I suppose if you're spending money, you're going to want to be there a long time. What is? You know the average lease period for for you know a shop like you're walking into down the high street?
Speaker 2:oh, look, generally the higher the value the um, the higher the value of the um. You know, the longer the tenure and the more they'll do a fit out. So it just, you know, the lower value staff they really want sort of that. You know they just don't have that expenditure or that business to support it.
Speaker 1:Long term, but they'll do year on year. You know things.
Speaker 2:Yeah, they'll take you know. So actually, just to explain the difference, a warm shell, so I can answer your question. A warm shell is something where there's a level of fit out already there off at air conditioning and there's stuff there. So you know they generally will either the tenants can move in faster, they don't have to spend as much on the fit out, but they do sort of have to accept a level of fit that's already there in the property sometimes.
Speaker 1:Now, if it's a cold shell or you take on a warm shell and you want to make your own changes, is anything possible? Can you do whatever you want, as long as it's, you know, council approved. Like the business is permitted there. I'm talking in terms of fit out.
Speaker 2:Look, generally landlords are pretty flexible. Generally landlords are pretty flexible. Generally landlords are pretty flexible. But, um, you know there's, there's weight, there's, you know weight loading sometimes. So you got to worry about you know a safety, um, you know, for joining, for adjoining owners, in terms of what you're doing in there. Um, and then that level of fit out, if you're fixing into the walls, you know you should be contacting Strata if you're driving a screw or a bolt into the concrete, or you know Strata should be notified, informed, and you know, have an acceptance around it and the owner as well. But there's, you know you'd be surprised with the tolerance.
Speaker 1:You'd be. You know landlords are pretty cool with it. Okay, that's good. And then you mentioned briefly you know it's not normal to take on a lease. You're obviously shelling out rent straight away and then you've got a period where you've got to finish, you fit up. Is that? Is there normally a bit of a grace period to get the business up and running from the landlord?
Speaker 2:Rent-free, yeah, and the higher value staff, the cold-shell staff, landlords will be more, and the longer the lease, landlords will be more tolerant to doing a rent-free on a cold-shell over a warm-shell. Landlords will be more tolerant to doing a rent-free on a cold shell over a warm shell. So for instance, on nice long leases, you know the incentives can be massive. So you know car dealerships and warehousing and stuff. People can have huge upfront incentives for a fit-out. They can get, you know, millions for a fit-out. They can have the fit out done for them or they get a rent free period of you know on that, on that as well. So as the tendency gets smaller like typically what we see on the northern beaches, is probably three months rent free on a five-year, like a five by five plus five lease. So five years for the tenants and five and another five year option for the tenants. Um, but gen, if there's access to the property prior, as an example, to um to the lease starting, then sometimes that's that's enough instead of a rent-free.
Speaker 1:That's good. That's helpful, I think, for people to figure out what the realms of normal looks like and then work backwards. What would you do if you were a tenant? Would you look for a cold shell or a warm shell? Where's the little bit of gold left behind, maybe from the previous tenant or the landlord? Where's the little bit of gold left?
Speaker 2:behind, maybe from the previous tenant or the landlord. Look, I think if you're an emerging, starting business, you know warmth's good, you know you're going to save half your money probably just on doing that stuff. You just take what you can get, whereas I think sort of the larger businesses and what I mean, like you know, four or more staff-style, three or more staff-style businesses you'll generally, you know, try to do it yourself, because you'll have preconceptions of what didn't work in the last premises and you'll want to fix those things in your new fit-out and bear in mind today, you know, I guess this can be applied to retail, it can be applied to offices, not necessarily industrial, pretty much industrial. It's pretty cold, chill anyway.
Speaker 1:Yeah, and when you take on your lease from the start, are you expected to return the property back to how that was when you started at the end? Yep, yep.
Speaker 2:Yep, Unless you get that agreement from the landlord prior to engaging the lease, or at the end they say look, don't worry, your fit out's wonderful. Leave it Happens.
Speaker 1:Do they ever pay for it? You do such a wonderful job. They say love it Never, never, never. So they don't go in with the expectation of that, nah.
Speaker 2:Your fit out's not going to be worth anything. About fit-outs in the city? Ah, my cousin who was asking me about fit-outs in the city and he said, you know, with this whole work-from-home thing and there's just less dependence on the CBD offices, he said, you know, what are you seeing happening with all that? And I said, look, I'm not seeing fit-outs, I'm not seeing people, you know, selling their fit-outs and stuff like that. They're just, yeah, yeah, chucking it out. Yeah, right, interesting. That's all the questions from me. There you go. So that's cold shell versus warm shell. Um, in commercial retail guys, if you're wondering what it is, that's a term that's always coined that can confuse people and hopefully help people today.
Speaker 1:Instagram viewers are pumping as well. We've got a Leo from Napoli joining this morning. Yeah, the Italian job, the Italian stallion, say good day to you. I've got a good holiday, leo. Yeah, there's. You know, there's certainly a lot of confusing times to work around, but that's single break away into is just ask the question. Stop bashing your head against the wall. Just ask the question, big time, 100%. There you go. Have a good Tuesday.
Speaker 2:Thanks everyone. Have a good Tuesday. Thanks, Billy Bob.
Speaker 1:See you.
Speaker 2:See you.