The True Cost of Vacancy

by CoyDavidson on November 3, 2010

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How the cost of replacing a tenant can add up for property owners

Losing a tenant can be a bigger financial blow to owners than simple loss of income.

The cost to re-lease and refurbish a space can add up, which is why spending a little extra to ensure strong tenant retention can yield building owners solid financial returns in the long term.

Landlord should take into account the full scope of potential costs when choosing whether to renew a tenant in their existing space.

  • Vacancy time – no lease payments made
  • Marketing costs – signs, open houses, direct mail, property web sites, tour incentives
  • Leasing costs – brokerage commission, leasing incentives
  • Professional services – including space planning, architectural and consulting services
  • Demolition – removal and disposal of the former tenant’s improvements
  • Materials – for tenant improvement construction
  • Labor – for demolition, construction and systems installation
  • Moving costs – a typical incentive to encourage a tenant to relocate
  • Free rent – in today’s markets, free rent may be offered in lieu of or in addition to tenant improvements or as simply a leasing incentive
  • Signs – both inside and outside the building
  • Professional services – legal, accounting and management fees
  • Relationship – to other tenants: is another tenant’s business tied to the departing tenant’s?

The Importance of Tenant Reps

In today’s market most companies utilize tenant representatives to represent their interests, even in lease renewals. Working with the brokerage community and maintaining business relationships with tenant representatives is also important for building owners.

A professional tenant rep is going to expose all the viable property options to his client, and while a brokerage fee will be required the chances of completing the renewal transaction will increase.

In terms of filling vacancies, Landlords who have excellent relationships with tenant advisors can expect increased prospective tenant traffic and deal flow which reduces vacancy time.

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