Can we rely on casually stating that a longer WALT signifies lower risk, is WALT really a metric based on which we can measure risk? Understanding what Weighted Average Lease Term (WALT) truly measures, and what it does not is critical. Let us discuss why WALT can be classified as a comfort metric, and not a risk metric.

What Is WALT?

WALT measures the weighted average remaining lease term across all tenants, using rental income as the weight, therefore, providing insight into how long current leases are expected to generate income. A longer WALT suggests more predictable cash flow over the near term, while a shorter WALT indicates upcoming lease expirations.

Formula: WALT = Sum of (Remaining Lease Term × Rent Contribution) / Total Rent

Suppose a property has:

One tenant contributing 60% of rent with 10 years remaining

And another tenant contributing 40% of rent with 2 years remaining

The WALT would be:

(10 × 0.6) + (2 × 0.4)

= 6 + 0.8

= 6.8 years

So, the property has a WALT of 6.8 years.

Insights from WALT

What it tells

• Average income duration, i.e. for how long the income is secured
• Lease maturity profile
• Revenue visibility and predictability

So, a higher WALT generally means more income stability in the near term.

What WALT Does NOT Tell

• Tenant credit quality
• Market rent reversion risk
• Lease renewal probability
• Sector cyclicality
• Re-leasing costs
• Asset competitiveness

What is a Good WALT?

A WALT of at least 3 years is usually considered good, but the number can vary with the asset class.

For instance, flex industrial properties usually have a shorter WALT because many flex tenants rent a smaller amount of space and term lengths are usually around 3 years.

On the other hand, an office building would typically have a longer WALT. Large office tenants tend to sign longer leases, and many large office buildings have at least one tenant using a very large amount of space, and  a WALT of 5 years or more seems ideal for such asset classes.

Why is WALT Important for Investors?

1. Cash Flow Visibility: The most direct benefit of a longer WALT is better cash flow visibility. WALT shows how far into the future rental income is secured under signed leases. When underwriting a commercial real estate deal, it is critical to know whether projected income is backed by existing lease contracts or dependent on uncertain renewals. A property with a 7-year WALT provides much stronger income stability than a property with a 2-year WALT, where a large portion of tenants could vacate before the business plan is executed.
   
2. Valuation and Cap Rate Compression: WALT directly impacts property valuation and cap rates. Assets with longer WALTs often trade at lower cap rates because the income stream is considered more stable and predictable. Lower cap rates mean investors are willing to pay more for each dollar of income. This makes WALT an important factor in return modeling and exit pricing. A strong WALT can significantly improve projected sale value at disposition.
   
3. Lender Requirements: Lenders closely evaluate WALT when assessing loan risk. A short WALT increases uncertainty about whether the property will continue generating enough income to cover debt service if tenants do not renew. Many lenders require a minimum WALT threshold before approving financing. In some cases, a declining WALT can even create covenant concerns under existing loan agreements. For this reason, WALT plays a major role in financing strategy and capital structure decisions.
   
4. Leasing Costs and Re-tenanting Risk: A short WALT signals that lease expirations are approaching. Lease rollover events bring real costs, including broker commissions, tenant improvement allowances, and potential vacancy downtime. There is also market risk involved. If market rents decline or the property loses competitiveness, replacing tenants can become expensive and uncertain. Investors analyse WALT to estimate how much future leasing costs may impact overall returns.
   
5. Portfolio Staggering Strategy: At the portfolio level, WALT analysis becomes even more strategic. Experienced investors evaluate not only WALT at the asset level but also lease expiration distribution across the entire portfolio. If multiple properties have leases expiring in the same year, the investor faces concentrated re-leasing risk and capital pressure. A well-staggered WALT profile spreads lease expiration over time, making management and capital planning more manageable.
   
6. Exit Timing Strategy: WALT is also critical when planning an asset sale. Selling a property with a long WALT is generally more favorable because the buyer is acquiring stable, contracted income. If the WALT is short or declining, buyers will likely discount the price to account for leasing risk. In some cases, they may avoid the deal altogether. For this reason, aligning exit timing with a strong WALT profile can materially improve sale outcomes.

Why is WALT seen as a risk metric?

In CRE investing, WALT is often considered a direct indicator of risk. Many investors instinctively equate a longer WALT with lower investment risk. Let us check the reasons for this perception:

1. Income Visibility: A longer WALT suggests that rental income is contractually secured for many years. This creates the impression of predictable and stable cash flows. From a high-level perspective, the further income is locked in, the safer the investment appears.
   
2. Reduced Near-Term Vacancy Risk: If fewer leases are expiring soon, there is less immediate rollover exposure. Investors take comfort in knowing they will not need to re-lease large portions of the property in the near term. This reduces short-term operational stress and uncertainty.
   
3. Lender Comfort: Banks and other lenders frequently favour assets with longer income duration. A strong WALT improves perceived loan serviceability and can sometimes lead to more favourable financing terms. Because lenders price risk conservatively, their preference reinforces the idea that long WALT equals low risk.
   
4. Institutional Signalling: Core and core-plus funds often market “long WALT portfolios” as defensive strategies. In volatile markets, long lease duration is positioned as a stability feature. This messaging strengthens the perception that long WALT is inherently safer.

All of these factors create a very straight-forward conclusion: Long WALT = Low Risk.

However, real estate underwriting isn’t all that straight-forward.

Why WALT is a Comfort Metric Instead & the Risks it Ignores?

While WALT provides psychological comfort about income timing, it does not directly measure the core drivers of risk. Why?

1. Credit Risk Still Exists: A 12-year lease signed by a weak tenant can be a lot riskier than a 3-year lease signed by a financially strong tenant. WALT does not measure tenant credit quality, balance sheet strength, industry disruption risk, or default probability. Long lease duration does not eliminate counterparty risk. If a tenant fails, the remaining lease term becomes irrelevant.
   
2. Market Risk Persists: WALT is not a shield against market shifts. For example: there is a long WALT where leases were signed at above-market rents. If market rents decline significantly, the asset may face severe rent reversion risk when those leases eventually expire. In sectors like office or retail, structural demand changes and macroeconomic events can erode asset competitiveness well before leases roll. WALT may delay exposure to market risk, but it does not eliminate it.
   
3. Cap Rate Expansion Overtakes WALT Comfort: Property valuation is highly sensitive to cap rate movements. Even if NOI remains stable and WALT is long, a rise in cap rates can immediately reduce asset value. WALT does not hedge against interest rate risk; hence, valuation risk operates independently of lease duration.
   
4. Expiry Concentration Risk: Two assets can show the same 8-year WALT and still carry very different risk profiles. One property may have well-staggered lease expirations spread across multiple tenants and years. Another may rely heavily on a single anchor tenant contributing the majority of income and expiring in year eight. WALT is an average, thus it masks lease concentration, because it smoothens maturity risk instead of revealing it.
   
5. Renewal Assumptions Are Only Implicit: Investors frequently assume that tenants will renew and that vacant space will be re-leased quickly. However, WALT only measures contractual time remaining. It does not measure the probability of renewal. Actual risk depends on market vacancy rates, competing supply, tenant relocation incentives, capital expenditure requirements at rollover, and broader demand trends. WALT does not account for any of these economic realities.

When is WALT Useful Then?

Despite all of this, WALT is absolutely valuable in CRE investing, but only when used in the right context. It should only support decision-making, not be the sole basis of it.

1. Debt Structuring: WALT is particularly useful when structuring debt. Matching loan tenure with lease maturity reduces refinancing risk. If a property’s WALT comfortably extends beyond the loan term, lenders and investors gain confidence that income will remain stable through the financing period. This alignment between lease duration and debt maturity improves capital structure resilience.
   
2. Liquidity Planning: WALT also plays a role in liquidity management. Assets with shorter WALT may face lease rollovers sooner, increasing the likelihood of vacancy, tenant improvement costs, leasing commissions, and downtime. Investors may need to maintain higher working capital reserves for these properties to absorb near-term leasing volatility.
   
3. Portfolio Allocation: At the portfolio level, WALT helps shape investment strategy. Core real estate strategies often target longer WALT assets to prioritize stable, predictable income. In contrast, value-add strategies may intentionally accept shorter WALT in exchange for repositioning upside. In this context, WALT becomes a strategic allocation tool rather than a standalone risk measure.
   
4. Comparing Similar Assets: WALT is most meaningful when comparing similar properties in similar markets with comparable tenant credit quality. If two assets are otherwise alike, a longer WALT may provide incremental income visibility and slightly lower near-term rollover risk.

How Investors Should Use WALT in Decision Making?

“Is the WALT long enough?” is not the right question to ask.

Instead, the questions asked should be:

• Who are the tenants?
• What industries do they operate in?
• What is the rent-to-market gap?
• What is the rollover concentration?
• What happens to value under cap rate expansion?
• What is the re-leasing cost sensitivity?

WALT is a useful descriptive statistic in commercial real estate, but it is not a credit model, a substitute for market analysis, a hedge against valuation risk, or a shield against capital market volatility. Treating WALT as a standalone risk metric oversimplifies underwriting and can result in mispriced acquisitions. In volatile interest rate environments and structurally shifting property markets, disciplined underwriting matters far more than relying on comforting averages. At RealVal, we go beyond surface-level averages and model the real drivers behind decision making. If you want clarity before you deploy capital, write to us at info@therealval.com .