Shawn Massey, CCIM, SCLS

Tenant Retention – Why it is important in today’s retail market!

I have spent a good portion of the last 24-36 months assisting my landlord clients with lease modifications and rent reductions in order to keep “Good Tenants” in business during the latest economic downturn. 

With the lack of new retail supply in the market you would think there would be ample tenant demand to keep the spaces full.  While this is the case in some markets and core centers it is not generally the case in many of the unanchored centers built in the last decade.   Keeping good quality tenants in business and in your center is paramount to stabilizing the properties value long term.

Landlords have been bombarded with tenant requests to reduce their rent during this difficult time.  Landlords are faced with losing a tenant and not be able to find a suitable replacement or accepting a lower rental rate that is below the pro-forma in which most investors initially purchased the property.  Thus a difficult decision must be made and we need to be cognizant of two factors;

  1. Do not let your pride affect your ability to grant a reasonable rent concession.
  2. Past valuations of the property need to be laid to rest and decisions need to be made on what is the best route to take to stabilize and hopefully grow the properties value in the future.

If the property owner and his team think the tenant is a good tenant and fulfills a niche within the centre and trade area then every consideration should be made to work with the current tenant.   When researching this post topic, I was fortunate to come across an excellent article in March’s Realtor’s Magazine.  In an effort to avoid duplication I am including the very fine points that Mariwyn Evans’ points out in her article below.

10 Tips for Tenant Retention in a Lessee’s Market

March 2012 | By Mariwyn  Evans

http://realtormag.realtor.org/commercial/feature/article/2012/03/10-tips-for-tenant-retention-in-lessees-market

Approach tenants early. In a market with vacancies in the high double digits, start lease renewal negotiations 12 to 24 months in advance.

Don’t bring in competing tenants just to earn an extra buck. In a tough market, it’s tempting to take any lease, but ignoring noncompeting lease clauses can cost you a tenant, get you in a lawsuit, and undermine percentage rents.

Invest to avoid functional obsolescence. Spending on upgrades may hurt the bottom line over the short term, but improvements will pay dividends in long-term tenants.

Educate tenants and owners about what the market is doing. Market knowledge about vacancies and any new properties coming online will help keep rent negotiations realistic on both sides.

Avoid guessing games. Offer a fair deal, use comps to explain your offer, and communicate your position clearly.

Keep the decision makers happy. The boss and office manager will notice factors such as HVAC and janitorial services. It’s a lot easier to replace a poor cleaning service than a tenant.

Don’t slack on face time. It’s not enough simply to provide a lot of services to tenants. Being available in person can sway that renewal decision.

Never go on the defensive. When a tenant calls to complain, you should listen, empathize, and solve the problem. Don’t make excuses.

Treat an existing tenant the way you’d treat a new one. Take an interest in each tenant’s business and stay in touch with tenants regularly, not just when they complain or it’s time for a renewal.

Put the real estate first. If a property is well-maintained, it gives tenants a reason to stay.

The End

The process of retaining a retail tenant who is looking for a reasonable rent concession starts with understanding your tenant and their business financials.  It is reasonable and required to request past sales figures and P & L’s for past 2-3 years and the current year to date numbers to look at any trends.   Retail tenants can only afford a set percentage range of occupancy cost relative to sales before they are simply working for the landlord.  These percentages vary by tenant category. 

I have used the term “reasonable rent concession” throughout this post to indicate that my clients have received many unreasonable requests from tenants merely trying to get a lower rent when a concession is not justified.  My advice to my clients is for every rent concession given you need to ask for something in return that benefits the property and landlord.  Some options to request of a tenant seeking a concession include:

  • Extend the current term
  • Have the tenant use the savings to remodel their space
  • Have the tenant to release an exclusive that will allow you to lease another space in the center.
  • Have the tenant update their signage
  • Have the tenant report monthly sales if they not already doing so
  • Maybe relocate the tenant within the center or allow relocation rights in the future
  • Be able to downsize their space or in some cases upsize their space

The bottom line is to make a strategic decision to work with the current tenants who will enhance your asset’s value in the long term.

I hope you will check out future weekly commentary at

www.RetailRocksintheMidsouth.com.   If you enjoy the commentary please subscribe online.

Cheers,

Shawn

Shawn Massey, CCIM, SCLS is a partner with The Shopping Center Group a 3rd party retail real estate advisory firm in their Memphis office, an adjunct professor in the graduate real estate program at The University of Memphis and a co-founder and Chairman of the Board for the Memphis Business Academy charter schools (K-12th grade) in the Frayser area of Memphis.  

For all your retail real estate needs (tenant representation, landlord representation and property, investment & land sales) I hope that you will choose The Shopping Center Group and me to represent you and your business.  We understand that representation is a privilege and that you have a choice!

The opinions expressed in this post are entirely my own.  They should not be considered the opinion of The Shopping Center Group, LLC in which I am associated.

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One comment

  1. Bob Wenner /

    Well said Shawn

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