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In commercial real estate, due diligence means knowing your tenants

In the current market environment, a commercial building without stable, long-term tenants is a big risk to an investor, while financially sound tenants strengthen an asset and contribute to its long-term value.

For pension fund executives, understanding the kind of tenants in a prospective commercial real estate investment — and how to keep them — is critical.

Given commercial real estate's state of play, an evolved investment strategy demands a vigorous plan to keep tenants happy and renewing their leases.

There are two things we know for sure: tenant satisfaction is directly linked to higher renewal intentions and replacing a tenant is almost always difficult and unprofitable. But as an investor, how can you possibly know if tenants are satisfied and how can you influence that satisfaction and protect your investment?

For investors considering a real estate allocation, particular attention should be paid during due diligence to the strategies in place to retain tenants. Here's how that works.

Asking the right questions

One powerful tool is a tenant survey. Typically, building owners will initiate a tenant-satisfaction survey, often in collaboration with the management groups they have vetted and put in place. Property managers, who have the most day-to-day contact with tenants, are often responsible for introducing the survey. While organizations may execute in different ways, the objective is always the same: to reach out to tenants, ask substantive questions and take action based on what they learn.

Investors considering real estate allocations need full transparency from management groups and property managers to ensure that such strategies aren't just window dressing.

Surveys, when carefully crafted, are powerful tools to get feedback. Questions might include: How satisfied are you with response time from your property manager? Would you feel comfortable recommending this property to others? How likely are you to renew your lease?

Surveying customers isn't new of course, but developing actionable insights is still rare. Why? Until commercial real estate began slipping two years ago, a lot of owners and investors focused on buying and selling, rather than a long-term strategy to build value. Times have changed.

Ask, then act

To cultivate loyalty that leads to renewals, owners must provide better and quicker service, offer improved communications and solve problems for tenants fast. But owners shouldn't seek tenant input unless they're willing to take action. Tenants who identify problems that aren't addressed will be frustrated and angry. That's why a plan, with follow-up and communications, is critical.

A vigorous plan might include capital or tenant improvements, making leasing more user-friendly or convening a tenant council.

When done with care, spending capital to make tenant improvements is a huge advantage. Data from a recent tenant-care survey revealed a pattern in one market. Tenants who were least likely to renew had a unique set of requirements for building improvements. As you can imagine, a targeted effort was initiated to spend on the areas most important to them.

By exploring what tenants want and delivering on their needs, owners engender loyalty. That results in the ultimate payoff in a competitive market: satisfied tenants who renew leases and maximize the value of the investment.

Bernhard Klein Wassink is chief marketing officer, GE Capital Real Estate.