In commercial real estate, one of the key metrics investors and lenders use to assess a property’s stability and risk is the Weighted Average Lease Term (WALT). WALT measures the average remaining lease term of tenants in a property, weighted by their rental income contribution or square footage occupied.
A longer WALT indicates more predictable cash flow and lower turnover risk, while a shorter WALT suggests higher lease rollover risk but potential upside if rents are rising. A strong understanding of WALT can help investors and asset managers assess lease stability, anticipate turnover risk, and make more strategic real estate decisions.
What is Weighted Average Lease Term (WALT)?
WALT provides insight into how soon leases are set to expire, which directly impacts both stability and potential revenue growth. Let’s take a look at the definition and formula for the weighted average lease term before jumping into some examples.
Definition:
The Weighted Average Lease Term (WALT) is the average remaining lease term of tenants in a property, weighted by either rental revenue or square footage.
Formula:
WALT = (∑ (Lease Term × Lease Value)) ÷ (∑ Lease Value)
Where:
- Lease Term = Remaining lease duration (usually in months or years)
- Lease Value = Can be either annual rent or leased square footage
Unlike a simple average, WALT accounts for the economic impact of larger tenants, giving a more accurate picture of lease exposure risk.
WALT vs. WAULT vs WALE: What’s the Difference?
In some markets, particularly in Europe and the UK, weighted average lease term is referred to as WAULT (Weighted Average Unexpired Lease Term). The key distinction is that WAULT explicitly emphasizes the “unexpired” portion of leases, though in practice, both terms are calculated the same way.
Similarly, in Australia and New Zealand, WALT is often called WALE (Weighted Average Lease Expiry), which may include vacant space as zero-term leases, slightly lowering the average.
- United States: The term WALT is the most commonly used.
- UK & Europe: WAULT is frequently used instead of WALT.
- Australia & New Zealand: WALE is the preferred term and may include vacant space in the calculation.
Weighting by Rent vs. Square Footage
WALT can be calculated by weighting either rental revenue or square footage, and the results can differ:
- Weighting by Rent prioritizes cash flow risk, giving more influence to higher-paying tenants.
- Weighting by Square Footage focuses on leasing risk, giving more influence to larger tenants regardless of rent paid.
Most investors use WALT by rent, as it better reflects income stability, but WALT by square footage may be useful in markets where large spaces lease at lower rates (e.g., industrial properties).
Why WALT Matters in Commercial Real Estate
Understanding the weighted average lease term is essential for evaluating both near-term and long-term stability in a commercial property’s income stream. Below are several reasons why it’s a critical metric:
- Cash Flow Stability: A longer WALT suggests tenants are locked into long-term leases, ensuring predictable revenue. A short WALT may signal upcoming vacancies or lease renegotiations.
- Risk Assessment: Investors analyze WALT to determine how soon they might face lease turnover. If many leases expire within a short window, vacancy risk increases, potentially impacting property value.
- Impact on Property Valuation: Properties with a high WALT often command higher valuations since they offer secure, long-term cash flow. Shorter WALT properties may have higher cap rates due to increased risk.
- Financing Considerations: Lenders prefer longer WALT properties since stable leases reduce default risk. Properties with short WALT may face tougher financing conditions.
How to Calculate WALT
While the concept of the weighted average lease term is straightforward, the actual calculation can differ based on whether it’s measured in years or months. Below are two examples illustrating how to compute WALT using both approaches.
Example Calculation (Years-Based WALT)
Assume a commercial office building with three tenants:
| Tenant | Annual Rent ($) | Remaining Lease Term (Years) |
|---|---|---|
| A | 100,000 | 5 |
| B | 150,000 | 3 |
| C | 250,000 | 7 |
Calculation:
- Weighted Sum: (100,000×5) + (150,000×3) + (250,000×7) = 2,700,000
- Total Rent: 100,000 + 150,000 + 250,000 = 500,000
- WALT = 2,700,000 ÷ 500,000 = 5.4 years
This means, on average, the leases in this building will expire in 5.4 years, weighted by rent contribution.
Example Calculation (Months-Based WALT)
Now, let’s use months instead of years:
| Tenant | Annual Rent ($) | Remaining Lease Term (Months) |
|---|---|---|
| A | 120,000 | 67 |
| B | 180,000 | 44 |
| C | 300,000 | 90 |
Calculation:
- Weighted Sum: (120,000×67) + (180,000×44) + (300,000×90) = 42,960,000
- Total Rent: 120,000 + 180,000 + 300,000 = 600,000
- WALT = 42,960,000 ÷ 600,000 = 71.6 months
So, the WALT for this property is 71.6 months.
Typical WALT by Property Type
Different property types have varying lease structures and tenant expectations, which influence what’s considered a “good” or typical weighted average lease term. Below are some common guidelines:
- Office & Industrial: Higher WALT preferred (5+ years)
- Retail: Varies by anchor vs. inline tenants
- Multifamily: Short WALT (typically 1-year leases)
Common Misconceptions About WALT
Although WALT provides valuable insights, it’s not a one-size-fits-all metric. Here are some common misunderstandings:
- “Longer WALT Always Better”: Not always—shorter WALT can be advantageous in rising markets.
- “WALT Measures Lease Quality”: It only measures duration, not tenant creditworthiness.
- “WALT Equals Lease Expiry Schedule”: WALT gives an average; detailed expiry schedules provide a more complete picture.
Conclusion
The weighted average lease term is a useful metric in commercial real estate, providing insight into lease stability, risk exposure, and investment potential. While a longer WALT suggests stability, a shorter WALT can offer opportunities in growing markets. Investors should analyze WALT alongside NOI, cap rates, tenant credit quality, and lease expiration schedules to get a more complete picture of a property’s value and risk profile.
By understanding and strategically managing WALT, commercial real estate professionals can optimize cash flow stability and enhance the long-term value of their real estate assets.