Weighted Average Lease Term, commonly referred to as WALT, is a key performance metric in commercial real estate (CRE). Savvy commercial property managers and commercial real estate investors are well-versed in WALT and for good reason—it’s often a major factor in investment decisions and portfolio management. 

Completely understanding and managing WALT is critical in the long-term success and valuation of commercial real estate investments, establishing it as an essential component of any investor’s quiver of arrows. 

What is WALT?

Weighted Average Lease Term evaluates investment viability, income stability, and tenant turnover risk in commercial real estate investments.

WALT examines a commercial property, investment, or portfolio by evaluating the remaining lease term for each tenant along with the square footage and dollars per square foot that the lease represents. WALT is:

  • Defined as the average time that existing commercial tenants are contractually committed to leased space within a commercial property or across a portfolio (like a real estate investment trust)
  • Expressed in years and factors in the size and income contribution of each existing tenant’s lease
An investment with a higher WALT suggests a longer average lease term, which typically indicates more stable, long-term rental income, and typically better or safer investment risk.

Why WALT is Key in CRE Risk Assessment

Risk is everything to commercial real estate investors, and WALT is a key component in CRE portfolio risk assessments.

Calculations of WALT correlate to the risk associated with tenant turnover and vacancy:
  • Longer WALT = Lower risk
  • Shorter WALT = Higher risk

Longer WALT calculation:

  • Meaning: Lower risk associated with tenant turnover and vacancy
  • Indication: Current leases are set to generate income over an extended period; of course, this assumes credit worthy tenants (which can fluctuate with the economy and world events).

Shorter WALT calculation:

  • Meaning: Higher risk of potential tenant turnover and vacancy
  • Indication: Neccesitates more proactive property management measures to maintain occupancy levels, including concessions, negotiations, and factors not always contemplated.

How to Calculate WALT

To calculate Weighted Average Lease Term:

  1. (For each tenant) Multiply their remaining lease term (in years) by your preferred weighting method, either their leased space’s square footage or annual rental income.
  2. Sum the tenant totals 
  3. Divide that sum by the weighting method used in step 1, either the total square footage or total rental income.

WALT Formula:

WALT = (Tenant’s Lease Term × Tenant’s Square Footage) for each tenant / Total Property’s Square Footage
  • Lease Term: The remaining duration of each tenant’s lease in years. This means using decimals to represent months if needed.
    • 2.00 = 2 years
    • 1.25 = 1 year and 3 months
    • 0.50 = 6 months
  • Weighting method: Use only one of the following:
    • Square Footage: The size of the leased space by each tenant (and the property total).
    • Rental income: The annual rental income from the tenant’s leased space (and the property total). 

Note: If using rental income, substitute that in place of the two instances of “square footage” in the formula above.

WALT Calculation Examples

See specific WALT calculation examples below.

Example Using Square Footage 

Scenario: 100,000 square-foot property

  • Tenant A: 40,000 square feet leased with 6 years remaining
  • Tenant B: 35,000 square feet leased with 3 years remaining
  • Tenant C: 25,000 square feet leased with 1.5 years remaining

Calculation:

  1. Multiply each tenant’s remaining lease term by their leased square footage:
    • Tenant A: 6 × 40,000 = 240,000
    • Tenant B: 3 × 35,000 = 105,000
    • Tenant C: 1.5 × 25,000 = 37,500
  2. Sum the results: 240,000 + 105,000 + 37,500 = 382,500
  3. Divide the total by the full property square footage: 382,500 ÷ 100,000 = 3.825

Result: WALT = 3.83 years

  • On average and weighted by square footage, tenants are committed for just under 4 more years.

Example Using Rental Income 

Scenario: $1,000,000 property (total annual rental income) 

  • Tenant A: Pays $250,000/year in rent with 5 years remaining
  • Tenant B: Pays $350,000/year in rent with 2 years remaining 
  • Tenant C: Pays $400,000/year in rent with .75 years remaining

Calculation:

  1. Multiply each tenant’s remaining lease term by theirby their annual rental income:
    • Tenant A: 5 × 250,000 = 1,250,000
    • Tenant B: 2 × 350,000 = 700,000
    • Tenant C: 0.75 × 400,000 = 300,000
  2. Sum the results: 1,250,000 + 700,000 + 300,000 = 2,250,000
  3. Divide the total by total annual rental income: 2,250,000 ÷ 1,000,000 = 2.25

Result: WALT = 2.25 years

  • On average and weighted by cash flow, the average remaining lease term is approximately 2.25 years.

Use Cases for Weighted Average Lease Term

When put into practice, WALT can be used in different ways: analyzing current investments, evaluating options in the market, and optimizing property management.

Analyzing Current Investments

WALT offers a detailed evaluation of the near future of a commercial real estate investment, which provides stakeholders with a more transparent and thorough review of the property’s financial condition, specifically the income predictability of the property. 

Evaluating CRE Market Value

You can also better compare properties within the market—WALT highlights those with potentially more secure cash flow profiles due to longer, weighted lease durations. 

The longer the WALT, the more stable the rental income, which should theoretically increase the property’s market value.

For example, a building with tenants (assume good-paying, credit-worthy tenants) on 10-year leases will contribute to a high WALT and the probability of a sustained cash flow.

Diligent investors closely scrutinize and use the WALT alongside other established valuation methods and key financial metrics like cap rates and net present value. This integrated approach empowers investors to make well-informed decisions grounded in a comprehensive understanding of income stability, duration, and overall investment quality.

Optimizing Property Management

A sophisticated real estate management team will utilize WALT, the credit quality of the tenant, and the nuanced dynamics of tenant-generated income for the property on a per-square-foot basis. 

The calculation serves as a financial compass to aid in decision-making regarding the strategic timing and prioritization of lease renewals or the acquisition of new tenants.

Strategic Lease Terms and Diversification Can Stabilize WALT

Seasoned investors and commercial property managers approach lease renewals and initiations with a keen focus on stabilizing the WALT. In pursuit of WALT stabilization, discerning landlords and property managers strategically:

  • Structure lease terms in alignment with the overarching objectives of the portfolio 
  • Encourage long-term leases, particularly with creditworthy tenants, including anchor tenants 
  • Implement staggered lease expirations and starts, a prudent tactic to safeguard against economic uncertainties and market downturns 
  • Incorporate a diverse range of tenant types and industries to reduce risks linked to the business cycles of any single tenant

These approaches mitigate the volatility of property cash flow, foster continuous occupancy, bolster overall property resilience, and enhance portfolio strength.

Optimize Your WALT with Expert Guidance

Working with our professional commercial property management team means gaining access to experts who thoroughly understand and undertake property owners’ goals. Our emphasis on real estate law ensures that all strategies, including WALT stabilization strategies, adhere to ethical and legal standards and fiduciary duties required by California law.

David Roberson
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