Markets are heating up. Vacancy rates are on the decline. Now is the time to focus on retaining good tenants, and evaluating those that are not.
“Retaining valuable tenants is a top priority on all of the properties we manage,” shares Cheryl Todd, Coreland Companies Vice President of Real Estate Management. “We understand that ensuring tenant satisfaction has a direct correlation to successful lease renewals, maintaining occupancy, and the long-term financial performance and value of the property.”
Management surveys confirm that tenants rank good communication as a top priority. They want to hear from property managers; they want to be assured that issues are addressed promptly; and they want to be informed of progress. More importantly, good communication allows the management team to better understand the stability of tenants.
“It is important that management teams work to create positive relationships with tenants. Effective communication allows us to know their strengths and weaknesses, and in turn, communicate this information to our clients. We want to be able to create a plan to help retain tenants and develop a strategy for dealing with a struggling or undesirable tenant.”
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Strong communication also allows teams to evaluate what the market will bear. Recently, an owner presented Coreland’s brokerage team with a common question: “Do we retain an existing local restaurant or take the space to the market with the goal of attracting a stronger, national tenant?”
The property, a neighborhood shopping center in Orange County, is located in a dense trade area with high income demographics. An existing, well-known local restaurant currently pays $2.75 per square foot with a possible five-year lease renewal. With the lease term coming to an end, ownership wanted to explore all options.
Key questions were asked: “Is the space marketable to national tenants? At what rent? What would be the quantifiable cost of losing versus retaining the tenant?”
“As a landlord’s representative it is our responsibility to look out for the best interest of our owners and enhance the value of our client’s properties,” said Matt Hammond, Coreland Companies Director of Retail Brokerage. “It is not always about generating a new deal, but rather making sure that the overall property and tenant mix is successful. A stable tenant mix increases the value of the property and only enhances potential leasing opportunities.”
The cost of re-tenanting, including tenant improvement allowances, construction costs for landlord’s work, down time, rent concessions and brokerage fees, is substantial. There is also the unknown risk of having to deal with code compliance and site upgrades associated with re-tenanting an existing structure. The brokerage team must be confident that the space is marketable at a competitive rate, and be able to reasonably quantify all associated costs. On the flip side, renewing the existing tenant might mean a reduction in rent and a possible tenant improvement allowance, but could amount to a much smaller investment with significant upside.
In this case study, the landlord would face potential re-tenanting costs of over $400,000, assuming the site is leased at a comparable rate. Renewing the existing tenant would mean a much smaller investment of less than $100,000, including a small tenant improvement allowance. With no intention of selling the property, the stability of cash flow and lower out-of-pocket costs are of greater value to ownership.
“Our teams are focused on making sure our clients always have the information they need to execute the best possible strategies,” said Coreland Companies President Chris Hite. “Effective communication can go a long way in making tenants feel valued, but an even longer way in creating value for owners.”