The Cost of Losing a Tenant: Did You Know That Losing a Tenant Can Result in Major Financial Loss: About $1.5 Million for a Moderate Sized Tenant of 10,000 Square Feet-Almost $1 Million More Than Renewing a Tenant?

By Hunt, Kristin Gunderson | Journal of Property Management, July-August 2013 | Go to article overview

The Cost of Losing a Tenant: Did You Know That Losing a Tenant Can Result in Major Financial Loss: About $1.5 Million for a Moderate Sized Tenant of 10,000 Square Feet-Almost $1 Million More Than Renewing a Tenant?


Hunt, Kristin Gunderson, Journal of Property Management


Following is an interview with David D. Hopwood, CPM, LEED-AP, General Manager, Senior Vice President, Jones Lang LaSalle Property Management Division

Building owners and managers of course never want to lose a stable, rent-paying tenant. It's a given that occupied buildings are higher performers with greater profit margins and ultimately, greater property values.

Still, making the case to real estate owners to invest heavily in tenant retention through incentives, programs or amenities can be difficult, especially when economic conditions are variable, and many owners are trying to merely "weather the storm."

Perhaps managers should take the unique approach of demonstrating to owners the potential cost of losing a tenant, using hard and fast numbers that will speak to their wallets. Such a technique might have more of an impact when trying to convince owners that tenant satisfaction--a key driver of occupancy--should be a top priority, said David Hopwood, CPM, LEED-AP, General Manager and Senior Vice President at Jones Lang LaSalle in Chicago.

The cost of losing a tenant can be quantified. In fact, Hopwood and some of his colleagues have generated a formula to help managers determine the cost of losing a tenant to show just how important, and financially critical, retaining tenants can be.

BY THE NUMBERS

The formula involves finding the difference between the sum of costs associated with renewing a tenant and the sum of costs associated with acquiring a new tenant. The amount of rentable square feet, the rental rate per square foot and the length of the lease term, also factor into the equation.

This formula is based on market conditions in Chicago's Central Business District. It suggests losing a tenant can result in major financial loss; in this case, about $1.5 million for a moderate-sized tenant of 10,000 square feet--almost $1 million more than renewing a tenant.

In an interview, Hopwood discusses the formula, the importance of tenant relations and innovative ideas for retaining tenants:

DAVID D. HOPWOOD, CPM, LEED-AP, GENERAL MANAGER, SENIOR VICE PRESIDENT, JONES LANG LASALLE PROPERTY MANAGEMENT DIVISION

Q. Why is tenant satisfaction important?

A. Tenant satisfaction is more than keeping the peace with those occupying a property; it's part of a much bigger picture. Satisfied tenants drive lease renewals. Lease renewals drive occupancy. Occupancy drives profit margins and property values. Solid returns make owners happy, which in turn keeps property managers gainfully employed. Just as positive tenant relations drive positive results, negative tenant relations have negative effects--often with huge financial implications.

Q. What possible financial implications might stem from dissatisfied tenants not renewing?

A. Based on cash-flow models used in underwriting, losing a tenant could cost an owner up to two years of revenue if you consider at least nine months of downtime while trying to acquire and sign a new tenant, three months of construction for new tenant improvements and another seven months of free rent on average for a seven-year lease--one month free rent for every year included in the lease. When you renew a tenant, however, you don't really face any of those costs; and if you do face costs like free rent, tenant improvements or leasing commissions for a renewal, the costs are on a much smaller scale.

Q. The formula and scenario you've outlined are based off Chicago's market conditions. How can this be applied to markets across the nation?

A. I did a quick calculation using the formula and basically determined that even with using half of the base rent, recoveries and tenant improvements, the result is essentially the same in that the total cost of a new deal versus the renewal is almost three times more expensive. Managers wanting to determine the cost difference between renewing a tenant and a new deal can simply plug their market- and building-specific metrics into the formula. …

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