Commercial real estate trends come and go, and keeping up can take a lot of work. Some tenants will always flock to the building with the coolest layout, in the best neighborhood, or with the most perks. Since you can’t pick up your building and move it to a better spot, and you can’t expose historic brick walls that aren’t there, there’s a limit to what you can do to retain trend-chasing tenants.
But, luckily for commercial property owners, there are a few things you can do to maximize renewals.
1. Build real relationships.
A good relationship means regularly checking in with your tenant, not just at renewal time. If you have a good relationship, you’ll know if your tenant is having issues with their space, or if they need to expand or contract. Finding this out early means you’ll have enough time to address the issues and retain the tenant.
It’s also important to understand your tenants’ businesses. For example, if a government contract represents more than half of a tenant’s revenue, gaining or losing a contract could require a major expansion or downsizing. Being able to help them adjust their space needs along with these changes will go a long way toward getting a renewal.
2. Carefully structure renewal options to ensure a smooth process.
Most commercial real estate leases include a renewal option at either a fixed price or a price pegged to the market rate. At Culmen Real Estate Services, we strongly recommend fixed price renewal options, even though at first glance they may look like a bad deal.
When you offer a fixed price renewal option, say $5.50 per square foot, the tenant can exercise that option at renewal time, even if the market rate shoots up to $7 per square foot. If the market rate drops, the tenant will expect you to lower the rate to match. So no matter what direction the market turns, the tenant will get a good deal.
However, we still believe this is better than offering a “market rate” renewal option, such as “95% of market rate,” because “market rate” is very subjective in real estate. You may have to bring in experts to establish what the true market rate actually is in your building. If your expert disagrees with the tenant’s expert, you could be in for a long legal battle.
3. Know how you stack up against your competition.
When a new commercial real estate development launches in your region, the sales representatives for that development will start pitching their brand-new spaces to your tenants, and you need to make sure you can compete. You might need to reinvest in your space or offer a break in rent. Otherwise, you might witness a mass migration out of your building at renewal time.
When you work with Culmen Real Estate Services, you can be confident that your property management team is doing everything possible to make sure your tenants renew.