Moving is not just inconvenient; it’s also expensive (and not just for the vacating tenant). Move-outs create landlord expenses, too.
While tenants are boxing their belongings and hiring moving companies to haul furniture and assets to a new location, the property management team is dusting off drop cloths and paint rollers or performing even more extensive cleaning and construction so the space can be marketed to prospective lessees. In fact, bringing in a new customer can be at least 6-times more expensive than renewing an existing one, says Jack Sullenberger, senior vice president of Parkway Properties Inc., Jackson, MS. Fiscally and logistically, building owners and managers should do what it takes to maintain tenant status quo in a building rather than to seek new tenants to fill vacated spaces - particularly in competitive leasing markets.
Released in December 2005, the Commercial Real Estate Spotlight from the Chicago-based National Association of Realtors (NAR) tracks activity in 57 U.S. markets. The report notes that office job growth over the last 2 years has created sustained improvement in the office sector. As a result, vacancy rates are projected to drop to 11 percent by the end of 2006, compared with 15.4 percent in 2004.
According to the report, net absorption of office space in the 57 markets tracked - which includes the leasing of new spaces coming on the market, as well as space in existing properties - is expected to be 78.3 million square feet in 2006, compared with 77.7 million square feet absorbed in 2004 and only 20 million in 2003.
In the retail sector, vacancy rates are expected to drop to 6.9 percent by the end of 2006, down from 7.5 percent in 2004. Net absorption of retail space is projected to be 31.6 million in 2006, compared with 27.1 million in 2004.
In an increasingly aggressive market, attention needs to be lavished on not only prospective tenants who can fill empty spaces, but also on those customers who already lease space. “It’s clearly more economical to maintain the current tenant base,” agrees Keith Konkoli, senior vice president of real estate operations at Duke Realty, Indianapolis.
Many of the same things that draw tenants to a building are also what keep them there: amenities, consistent and comprehensive service, a favorable leasing arrangement, and economic considerations. But behind these factors looms something more important - a strong, positive relationship between building management and tenants. Nothing breaks a deal and sends tenants packing faster than shaky relations with the facilities management team. “There are reasons why people move out over which we have no control,” Sullenberger says, citing company relocation, growth, or closure as some of these reasons. “But, we don’t want them moving out because they are unhappy with the property or the management.”
Before Signing on the Dotted Line ...
Management/tenant relations begin well before the ink dries on a lease. The crucial foundation for this long-term relationship begins prior to the lease signing. “The relationship doesn’t end once you get the signature on the dotted line,” notes Kevin Benedix, senior vice president, Gale Global Facility Services, Boston. “In fact, it starts before that with a tour during the leasing program. The maintenance of that relationship starts there and continues through negotiations, signing, and tenant fit-out.”
The property management team and the leasing agent need to work together early on to give tenants realistic building information and timeframes for renovations and moving.
Consider Flagship Corporate Center at 775 Prairie Center Drive in Eden Prairie, MN, owned by Omaha, NE-based Magnum Resources Inc. and developed and locally managed by The Opus Group, Minnetonka, MN. Two years ago, the management of Twin Cities-based Voyager Bank sought the perfect location to merge two growing offices and create a corporate headquarters facility to support not only banking customers but multiple branch offices throughout Minneapolis and St. Paul. “We needed more space,” explains Scott A. Weaver, Voyager Bank’s president and chief operating officer. “We initially started with a small space and ended up with two. The ultimate plan was to consolidate into a larger facility.”
Size, however, wasn’t the bank’s only requirement for a new corporate home. Weaver recalls that Voyager decision-makers also wanted to inhabit Class-A office space that better reflected the scope of the bank’s business, which caters to business clientele. “We didn’t need to have the most high-traffic retail location,” he explains, noting that the bank’s customer base draws from throughout the Twin Cities. “We wanted to build a hub in a location that people can get to - a first-class location.”
A vacancy at Flagship Corporate Center (and its Class-A image) caught Voyager’s attention. The building’s location near Interstate 494 was convenient; so was the available space - about two-thirds of the 4-story building’s first floor. Those factors drew the bank to the facility, but the strong relationship its officers have developed with Opus’ property management team will likely be what Weaver and other Voyager decision-makers will consider most important when it comes to re-signing their lease in 12 years.
Why? Responsiveness and flexibility on the part of the Opus facilities management team, Weaver says, particularly the fact that Opus was willing to renovate the building’s first floor to accommodate a drive-up banking window before Voyager even occupied the space. It was the dealmaker or breaker on the lease, Weaver says. “It was a 100-percent necessity,” he says. “The building owner and manager worked with us so it was both functional and looked good. It doesn’t detract. It looks like it was built when the building was built. And, it has enabled us to be able to operate from here.”
Tenant retention is more than favorable first impressions:The relationship-building doesn’t end there.
After tenant move-in, the property manager should maintain contact to understand the tenant’s changing needs and concerns. There’s more to the management/tenant relationship than disappearing until 6 months before a lease comes up for renewal. Check in to see if the space is working for them. Do they have enough space? Too much? How can you, as the facilities manager, ensure that a tenant’s real estate requirements are being met?
“People get buried in the day-to-day stuff and overlook the important things they should be maintaining,” Benedix says. “You get to Year 3 in a 3-year deal, and it’s too late to recreate the wheel.”
Cultivating Customer Satisfaction
Simply put, tenant retention can be linked to customer satisfaction. Customer satisfaction comes from attentive service - whether it is small touches like fresh flowers in the lobby or lotion dispensers in the restrooms, or constant attention to cleaning services and ongoing preventive maintenance. “You have to make sure tenant services are at a very high level so [tenants] don’t want to leave - [and won’t] be inconvenienced to leave,” says Mike Dwyer, vice president and national director of property management, The Opus Group, Minnetonka, MN.
In Duke Realty Corp.’s facilities nationwide, facility teams monitor tenant approval through the company’s “complete customer satisfaction program.” The program takes basic service premises and tailors them to individual tenant’s needs and timeframes. During the design and build-out phase, for example, the plan follows a checklist to make sure the approved design becomes the building or space the customer expects. The program also keeps facilities management teams ahead of tenant-service requests. “We have people in the buildings on a regular basis to preempt issues tenants have through comprehensive preventive maintenance programs,” Konkoli says. “We have people in the building looking for things so the tenant doesn’t have to take time out of the day to tell us there is a problem.”
There’s a fine line between servicing and over-servicing, however. “Some want to see you every day. Some don’t want to see you unless there’s a problem. There are also the people in between,” Konkoli says. “You have to make sure you are servicing everyone’s needs.”
As a tenant, Weaver views good facilities management service this way: “I like [our facilities manager] but I don’t want to talk to him every day; that means something is going wrong. It’s like talking to attorneys about bankruptcy matters. The less I talk to [him or her], the better.
“If you step back and think about it, there’s a lot of stuff going on, but if it’s invisible to the tenants, that’s a good thing. It’s key for us - both our employees and customers - [to have] a first-class facility and [to maintain it] that way. The [smaller] the amount of time and effort that we need to spend on it, the better.”
The Economic Equation
While a good, ongoing relationship with your tenant base represents the cornerstone in any retention initiative, economics undoubtedly shape a deal - for better or worse.
“The economics are a big driver,” Dwyer says. “You have to make sure your operating expenses are tight, and that you’ve watched them closely; in the end, the tenant pays the operating expenses.”
Operations make or break the bottom line for landlords: Good ones bring in profits for building owners and managers and keep tenants happy, and poorly managed ones can send tenants back into the leasing market.
“Maybe you have a 15-year-old asset, and the guy down the corner has a shiny new one. Bottom line is everything,” Benedix says. “We make sure we’re on top of cost efficiencies. We constantly re-engineer, rebid, review, and redesign operations to make sure we run our utilities and everything more efficiently.
“The guy down the street might have better amenities, but he might not be able to operate at [as low of an] escalation as you. Tenants appreciate great service and efficient service, but they also appreciate low costs. The bottom line is that the operating escalation charge is going to be a big factor in the decision process.”
And it all ties into the lease - the final piece of the retention equation. Dwyer notes that the typical corporate lease term runs between 10 and 15 years, but he is seeing more 7- and 8-year leases. The multi-tenant market, he says, runs on a 3- to 5-year cycle.
Regardless of lease length, check in with your tenant between 12 and 18 months before the lease renewal date arrives. Ask again how the space is working. Ask if they have thought about lease renewal, and if they are planning to renew the lease as is or if they need to make adjustments.
“You don’t just show up on a tenant’s doorstep 6 months before a lease expires and hand them a renewal of occupancy,” Dwyer says. “You have to build [a relationship] and maintain it over time. You don’t show up in Year 10 and become the guy’s friend.”
And what about lease incentives? It depends on the market. Both you and the tenants are in business and need to turn profits. But, that’s not to say there isn’t room for negotiation.
“Obviously, the conditions of the market are going to affect how you look at different transactions,” Konkoli says. “If you’re in a market with 20-percent vacancy, you might be more aggressive than in a situation with a 4- to 5-percent vacancy. You still have to be competitive. People will pay a little more for service, but they certainly aren’t going to overpay.”
Flashy amenities might bring tenants in and keep them comfortable, but - in the end - successful tenant retention comes down to consistency: consistent relationships, consistent operations, consistent communication, and consistent business practices. “You need consistency across the board, from standards of operation to fair leases and fair lease negotiations,” Sullenberger says. “If you have that, chances are they’ll stay.
“The only reasons a customer should move out of one of our buildings is if they have merged with another company and have to move out, closed their doors and are going out of business, or we can’t accommodate their square footage. We don’t want to hear that a customer has to move out because of poor service.”
Dwyer agrees. “Don’t provide them with reasons to leave,” he says. “Give them reasons not to leave. There are very strong ways to keep a tenant happy and to keep them [as] an occupant. It takes the whole life-cycle [of a lease]. Communication, cost efficiency, amenities: They’re all part of that process.”
Robin Suttell ([email protected]), based in Cleveland, is contributing editor at Buildings magazine.