Leveraging Efficiency to Avoid Tenant Churn
There’s a strong correlation between energy efficiency and tenant retention. If you think about the benefits of energy efficiency from a non-financial perspective, it makes perfect sense that an efficient building would yield happy tenants – and ones that would be less eager to get out of their leases. Efficient buildings are simply more comfortable and attractive. If the tenants are paying their share of the utility bill, then there’s also a financial benefit that they would likely lose by moving to a less-efficient building.
Today, I’d like to share an article with you that succinctly and effectively conveys the value of tenant retention. This article, written in 1992 for BOMA’s Skylines magazine by Richard C. Mallory and Anton N. Natsis, was titled “Tenant Retention in the ‘90s.” At the time, the real estate business was so terrible that the mantra of developers was, “Stay Alive 'til ‘95.” 1992 was right in the middle of that roughly five-year real estate recession and the cost of tenant turnover at that time was truly shocking.
The authors asserted that if you had an existing tenant paying $2.35/SF/month who was wavering about renewing its lease, reducing that existing tenant’s lease to $0.95/SF/month to prevent turnover would be equivalent to charging a replacement tenant $2.35/SF/month. Why? Because there are so many costs involved with tenant turnover (e.g., leasing commission, build-out vacancy, free rent period, tenant fit-out allowance) without even considering the rental revenue lost while you’re waiting to attract the new tenant.
The real estate climate has obviously changed in the last twenty years; however, tenant turnover is still very costly for a landlord. If you’re selling efficiency products in the commercial real estate environment, be sure to drive home this idea – and back it up with facts – in your value proposition.
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