One of the biggest mistakes one can make when leasing out commercial real estate is underestimating the importance of retaining tenants.
While having all your properties occupied is great any given time, nothing beats having them occupied by great, long-term tenants. For starters, you don't have to worry about losing money on an empty property while finding and vetting a new tenant. Additionally, you don't have to waste time and resources doing so.
What Is Tenant Retention And Why Is It Important?
Tenant retention is the rate at which you change tenants in a commercial property. In other words, it is a measure of how many tenants have leased your property in a given period.
There is a lot you can learn from your tenant retention rate. It shows you whether or not tenants are sticking around, which, in turn, indicates their levels of satisfaction with the premises and the property management.
Moreover, measuring your tenant retention rate and how it is changing can give you an idea of the progress and growth you have made. It also allows you to set measurable goals.
There are several important variables and metrics used when analyzing and measuring tenant retention. These include the cost of retaining a tenant, cost of acquisition, and tenant lifetime value. By understanding these variables, you can put measures in place to increase the profitability of your commercial premises.
Cost Of Retaining Vs Acquiring A New Tenant
When considering the importance of retaining tenants, it is important to consider the cost of retaining a tenant and how this compares to the cost of acquiring a new tenant.
The cost of retaining a tenant is the amount it would cost to keep an existing tenant. This could include, for example, the cost of improvements to the property or your customer service.
The cost of acquiring a new tenant, on the other hand, is the amount it costs you to acquire one new customer. This could include, for example, the cost of advertising the property on craigslist.
The Journal of Property Management estimates the average cost of acquiring a tenant in commercial real estate to be about $900 a year.
Generally, the cost of keeping an existing customer is much lower than acquiring a new one and will be more profitable in the long run. An article in the Harvard Business Review estimates the cost of acquiring a new customer to be somewhere between 5 to 25 times more expensive than retaining an existing one.
Acquiring new tenants is less profitable as the property may remain empty for a while until you find a new tenant. You’ll also need to pay to advertise the property and take time vetting potential new tenants. All of this costs time and money.
Lifetime Value (LTV) Of Commercial Tenants
The lifetime value of commercial tenants is the profit you make from a tenant over the period they are renting from you.
For example, if your rent is $10 000 a month, and your tenant rents from you for 1 year, their lifetime value will be $120 000.
However, each year they stay on, you are avoiding the cost of acquiring a new customer. So, assuming your cost of acquiring a new customer is the estimated $900 a year, your tenant's lifetime value for two years will be $249 000. This is because you are receiving $240 000 in rent over the period, and saving on the $900 it would cost to acquire a new customer for the second year.
Why It Matters
Understanding the lifetime value of a tenant will help you decide whether to invest in tenant retention. Moreover, it will help you decide how to go about investing in tenant retention if you decide to do so.
Let's go back to our example. The LTV of a retained tenant for two years is $900 more than that of two unretained tenants for the two-year period.
Therefore, as long as your cost of retaining the tenant is less than $900, you will be making more profit with a retained tenant over that period. In other words, your cost of retaining your tenant will be less than your cost of acquiring a new tenant.
This shows you just how valuable tenant retention is. It also gives you an idea of the budget you are working with when it comes to tenant retention. Because you know that you are saving $900 a year with retained tenants, you will likely be less hesitant to invest, say, $300 a year into retaining your tenants through improved customer service.
How Loyal Tenants Help Increase The Profitability Of The Property
Although your cost of recruiting a new tenant might not be the estimated $900, the truth is that acquiring new tenants is costly.
Your property will likely be empty for a while, which means that you will get no rent payments for a period. On top of this, you will likely have to incur marketing costs to find a new lessor for the property and further costs to vet potential tenants.
All of these costs would be avoided if your tenants were loyal and simply stayed on. In this way, loyal tenants help increase the profitability of your property.
How Does Tenant Experience Play A Role?
Did you know that an estimated 68% of renters leave because of poor customer service? This shows that one of the most effective ways to improve your retention rates is to improve your customer service and tenant experience.
Good customer service essentially boils down to good communication with your tenants. You want to engage with your tenants and facilitate tenant involvement.
When your tenants are involved, it makes it easier to understand their needs and expectations so that you can do your best to meet them. Tenant involvement is essential to a good tenant experience. This, in turn, leads to loyal tenants that are more likely to continue leasing your commercial premises.
Final Thoughts
Increasing tenant retention is one of the easiest and simplest ways to increase the profitability of commercial premises. This is why many property managers, facility managers, and asset managers are investing more and more into tenant retention. To remain competitive and get the most from your properties, you should be too!
If your organisation is looking for a tool to involve all tenants in property management for better decision-making on workplace and property strategies, have a look at our 30-day free trial:
We are building the world's first operational involvement platform. Our mission is to make the process of finding, sharing, fixing and learning from issues and observations as easy as thinking about them and as rewarding as being remembered for them.
By doing this, we are making work more meaningful for all parties involved.
More information at falcony.io.
