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The WALE by income: Insights for investors and practitioners in commercial real estate investments and valuations

At first glance, the WALE by income appears to commercial real estate practitioners and analysts as a metric to identify the security profile and risk profile of commercial property. However, the WALE by income is not clearly conceptualised. The use of traditional valuation models plays a significant role in contributing to the lack of inquiry into the characteristics of the WALE by income. Furthermore, alternative commercial property valuation approaches, such as the regression approach, rely heavily on the WALE by income as an input to estimating commercial property yields. Such alternative valuation approaches may become more prominent given the globalisation of commercial real estate investments and also analysts using these alternative methods to complement the conventional valuation measures. At a bare minimum, the characteristics of all inputs to models must be understood. These statements serve as the motivation for this paper. The WALE by income is deconstructed and carefully analysed. Three previously hidden, yet key, characteristics of the WALE by income have become apparent. The first insight is that the WALE by income cannot be calculated without a discount rate. The second insight is that the WALE by income produced at a point in time is sensitive to the discount rate that the analyst selects. The third insight is just as significant and may surprise seasoned commercial real estate practitioners. When the building is completely vacant, the WALE by income does not take a value of 0; instead, it is, mathematically speaking, undefined.