There’s a strong correlation between energy efficiency and tenant retention. If you think about the benefits of energy efficiency from a non-financial perspective, it makes perfect sense that an efficient building would yield happy tenants – and ones that would be more eager to renew their leases. Efficient buildings are often more comfortable and attractive. If the tenants are paying their share of the utility bill, then there’s also a financial benefit that they would likely lose by moving to a less-efficient building. And if they are performing work that would benefit from more effective lighting, greater thermal comfort, etc., then they would likely also enjoy non-utility-cost financial benefits (e.g., lower scrap rate, fewer clerical errors, or lower absenteeism).
Today, I’d like to share an article with you that succinctly and effectively conveys the value of tenant retention. This article, written in 1992 for BOMA’s Skylines magazine by Richard C. Mallory and Anton N. Natsis, was titled, “Tenant Retention in the ‘90s.” At the time, the real estate business was so terrible that the mantra of developers was, “Stay Alive 'til ‘95.” 1992 was right in the middle of that roughly five-year real estate recession and the cost of tenant turnover at that time was truly shocking.
The authors asserted that if you had an existing tenant paying $2.35/SF/month who was wavering about renewing its lease, reducing that existing tenant’s lease all the way down to $0.95/SF/month to prevent turnover would be equivalent to charging a replacement tenant $2.35/SF/month. Why? Because there are so many costs involved with tenant turnover (e.g., leasing commission, build-out vacancy, free rent period, tenant fit-out allowance, legal and accounting) without even considering the rental revenue lost while you’re waiting to attract the new tenant.
The real estate climate has obviously changed since then; however, tenant turnover is still very costly for a landlord. If you’re selling energy efficiency products in a commercial real estate setting, be sure to include this concept in your value proposition – and back it up with facts.