A tactful tenant retention strategy is one of the most important strategies that a building owner or manager can implement. This is why focusing on keeping your tenants happy is critically important to your business. At the end of the day, happy tenants drive profit.
This is probably an obvious statement to you and I’m sure you understand that losing a tenant directly impacts your building’s bottom line. After all, empty space doesn’t pay the bills. But the true cost of losing at tenant is much bigger than just lost revenue. Replacing a tenant means incurring additional marketing expenses, commissions, and TI allowances. This can add up to a whopping 3X the cost of retaining an existing tenant.
To truly understand this detriment, let’s consider a scenario where a tenant leaves their office space of 10,000 square feet with a rent of $40 per square foot. Here’s how this would impact your building financially:
This is an obvious cost associated with losing a tenant. Of course, if your tenant leaves, you’re not accruing rent from the vacant space – after all, no one is even there to pay it. In this scenario, let’s be generous and say that you will be able to fill the space within three months. That’s a pretty quick timeline to filling the space but losing rent from those three months means a total loss of $100,000 in revenue.
To fill the space, you need to market the space efficiently and attractively. Marketing expenditures can sneak up on you quickly, adding to the cost of losing a tenant. However, this one can be tricky to allocate. On average a reasonable assumption is that marketing costs around $1.00 a square foot. In our scenario, that translates to a minimum of $10,000 to get the word out about the vacant space.
Of course, to rent the space out you will have to pay commission. In most cases, the commission for a new lease vs. a renewed lease will be higher. Let’s assume that the broker fees are around 6% for a new 7-year lease, but only about 4% for renewal. Even keeping things this simple and ignoring annual rent escalation, the difference is $56,000.
This is where things really start to add up. It’s not unreasonable for building owners in major markets to shell out $50 per square foot in tenant improvements on new leases. Most also end up paying something on renewals but it’s typically much less. Even if it’s as much as $15 per square foot, that’s a difference of $350,000.
All-in, the cost of losing a tenant vs. renewing can easily exceed $500,000 (and that’s rounding down!).
So, how do you keep your tenants renewing?
The standard answer you may hear is to have a building in a great location with a lot of desirable amenities. But location and amenities are priced into the rent and by themselves, they’re not necessarily enough to retain tenants, nor are they necessarily require to be competitive. Today, tenants crave an end to end experience from the moment they enter your building in the morning and leave your building in the evening. Keeping tenants satisfied is all about creating a building people want to work in and are proud of.
To make the most of what your building has to offer, understand the foundation of what drives the best tenant experience. This is key to providing an experience that keeps your tenants coming back. Start by focusing on the following:
- High quality, proven service
- Proactive communication
- Tenant sentiment measurement
As tenant expectations continue to grow, building owners and managers must focus on giving tenants the best experience to generate further loyalty to their building. This will keep your tenants renewing their leases and could ultimately save you half a million dollars.
To learn how to keep your tenants satisfied read 12 quick tips for busy CRE professionals to keep tenants happy and make them stay.
It’s nearly impossible to truly gauge tenant satisfaction without proper measures in place to track and monitor their happiness. Monitoring satisfaction ties directly to tenant retention. Find out how we can help in a quick demo.