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The Hidden Costs of Tenant Departures
“I don’t mind losing tenants,” said no CRE landlord or property owner ever. When a tenant fails to renew a lease or leaves, it can mean problems—or possibly, opportunities—for the asset in question. As a recently released JLL report stated: “The true costs of tenant turnover are frequently underestimated.”
A True View of Turnover Costs
In “The Price of Losing Tenants,” the author suggests that owners and landlords need to go beyond vacancy and refurbishment costs to determine the hidden expenses associated with a tenant walking away. Some of the costs include:
Operating expenses. During a refurbishment period, a property’s operational expenses still need to be paid—but without rental income. No tenant means no incoming payments.
Marketing fees. Money is required to list the property with a broker and provide photos for brochures, among other issues. Brokers are also paid commission for their assistance in securing new tenants.
New lease costs. Other hidden costs are services needed to draft and negotiate a new lease agreement. There is no “one-size-fits-all” lease, as each tenant’s needs are unique. Additionally, the tenant might demand incentives or additional TIs before moving into the space.
Reputational risks. If many tenants decide to vacate at once, this may indicate problems with ownership or the property’s management. This could mean that fewer potential tenants are willing to examine the space. As mentioned above, empty space doesn’t generate income.
Keeping the Tenants in Place
There are legitimate reasons why tenants might move from one property to another. The space might be too small, and the building in question doesn’t have anything larger. The tenant is going out of business. The tenant needs to relocate for some reason.
The report explained that property owners and managers can help improve lease renewal rates (rather than having to find new tenants) by systematically and proactively addressing upcoming expirations.
Additionally, ongoing communication with the tenant can help reduce turnover rates. “It’s important to gather tenant insights across all operational levels as part of active asset, property and facility management initiatives,” the report suggested. “This ongoing dialogue also provides indications of the likelihood of tenant retention.”
- ◦Lease
