Good tenants are like gold for commercial real estate professionals. Finding a tenant with a reliable business reputation who is also an excellent fit for a commercial property can be a time-consuming process. However, it’s also crucial to that property’s eventual success.
The tenant selection process involves a lot more than just filling a vacancy. The goal is to choose the best tenant for your property and keep them for the long term. This can help to maximize the property's value and profitability, while minimizing vacancies and tenant turnover.
Property owners and brokers often spend hours figuring out how to choose tenants and prospecting for leads, only to rely on guesswork when it comes to finally selecting a tenant. This often results in the wrong tenant being chosen, leading to costly and time-consuming turnover.
We’ve put together this comprehensive guide to better equip you in your tenant selection process, including a glimpse of the best supportive technologies available that make the process easier and more efficient.
The Importance of Choosing the Right Tenant
Good quality tenants help to ensure a steady and reliable rental income for a commercial property.
They can also contribute to enhancing a property’s overall value by keeping up with maintenance, making improvements, and bringing in a consistent flow of paying customers.
Poor tenant selection, on the other hand, can be detrimental to your commercial property’s success. Tenants who are unable to pay the rent lead to financial losses which eat into your profits. In the worst-case scenario, you get stuck with the legal costs of trying to evict a defaulting tenant.
Tenants that don’t take care of your property well can also lead to unexpected maintenance costs when their lease ends. Vacancies and defaulting tenants often negatively impact the surrounding businesses in a commercial center, so this is something which should be avoided as much as possible.
All these headaches can be avoided (or at least minimized) by having a well-defined tenant selection process. By establishing clear criteria for selecting tenants at the outset, it’s more likely that you’ll get the best tenant possible, and be able to establish a long-term mutually beneficial relationship.
How to Choose the Right Tenant
We’ve already established that having a clear tenant selection process is essential, but there are several other important steps which can assist your search.
While the process of market research, finding leads, and choosing your tenant can be time consuming and difficult, there are also online technologies available which can help to fast-track this process.
Property intelligence platforms which link GIS to real estate analytics are very helpful for research, and some of them also have capabilities which help you find tenants quickly and easily. We’ll cover more details in the next steps.
Step 1: Understand your Property’s Unique Selling Points
Before thinking about how to choose tenants, get to know your property and its attributes well. Understand what makes it unique.
You’ll want to start by analyzing what makes your property different from others in the same sector of commercial real estate.
For example, if you own a retail mall, you’ll need to look at other retail malls of a similar size, with similar features and amenities on offer, and in locations with similar demographics to yours.
Perhaps there are some unique characteristics about the location of your shopping mall. It might be close to a popular theme park for example, or near to the airport. All of these will affect the type of tenants that are attracted to your center.
You’ll also need to spend some time analyzing and understanding the nuances of how your property fits into the local commercial real estate market. This might include foot traffic trends, rental rates, and more. These analytics will give you an indication of market supply and demand in your area.
Using a GIS analytics platform to map out your demographics and market trends will fast-track the process considerably. Furthermore, you’ll get access to deep insights into your location and target market. Even if you choose to do the research manually, don’t skip this step as this data is going to help you define your ideal tenant.
Step 2: Determine your Property’s Ideal Tenant Type
Having a very clear picture of your ideal tenant/s will help focus your marketing efforts and streamline your tenant search.
Use the data you collected from your research in step one to define ideal tenant types in terms of business type, industry, size, and budget.
It's also important to understand the nuances of different commercial real estate tenant types, such as retail, office, or industrial, as each has unique leasing and operational requirements. You’ll need to know what your particular sector’s tenants are looking for and make sure you provide that.
Additionally, you might consider performing a void analysis to identify any gaps in your property's tenant mix and to determine what type of tenant would complement the current tenant roster.
By understanding who you want to focus on and the types of tenants that would work well together, you’ll be in a solid position to start collecting leads.
Step 3: Source Potential Tenants’ Details
It’s important to avoid blanket marketing tactics when looking for tenants for your commercial property, as these often bring in a pool of unqualified or unsuitable leads, leading to time and resources wasted.
A good place to start is with your existing network of contacts, which might include industry associations and trade organizations, and possibly other CRE brokers too.
You can also leverage online property portals, social media, and commercial real estate listing websites to find leads.
Local newspapers and classified ads, although considered a bit ‘old-school’ nowadays, can be useful, but be aware of potential pitfalls, such as scams or unqualified leads.
Finding leads is often the easy part, but getting access to their contact details leaves you at a dead end. You’ll have to be resourceful, and get used to cold calling, if you want to access these details the old-fashioned way.
You can also use a GIS analytics platform to help you access this data. AlphaMap, for example, has a powerful tenant-finding feature which takes the hassle out of finding the tenants details.
Step 4: Evaluate your Potential Tenant
Once you have a list of potential tenants, it's time to start the evaluation process. This step is essential as it’s where you’ll pick up possible red flags as to a tenant’s affordability and business stability.
Since you’re in commercial real estate, you’ll most likely be dealing with a business as opposed to an individual, which can be a little more complex. However, running a thorough due diligence on a potential tenant is a step that should never be skipped.
Landlords usually want to gain an understanding of the tenant's financial stability to ensure they have the capacity to pay the rent. This will include a credit check, as well as an assessment of income and debt.
It’s important to evaluate the tenant’s business itself which includes operations, management, marketing and sales strategies, business plans, and financial projections. This process will give you insight into how stable the business is.
A tenant with a proven track record for business success is going to stick around for longer and ultimately reflect on the property owner’s bottom line.
Lastly, it’s important for a landlord to assess the tenant’s experience and reputation in the industry to determine their track record for paying rent on time, being a good tenant, and running a profitable business. An experienced tenant is more likely to be reliable and look after your property well.
Step 5: Negotiate the Lease Terms
A successful lease negotiation requires a thorough understanding of the market trends and the priorities of the tenant.
It's important to strike a balance between tenant improvements, concessions, and rental rates to meet the tenant's needs while ensuring profitability for the commercial property owner.
The lease terms must be tailored to meet both the tenant's and property owner's needs while clearly defining who is responsible for what. Depending on the sector of commercial real estate, the lease structure may vary significantly, with different expectations for maintenance and cost requirements.
For example, most industrial properties use a triple net lease, which leaves the responsibility of building maintenance on the tenant, while shopping mall and office owners often contribute to tenant fit-out costs. Lease lengths also vary greatly between sectors.
Seeking professional guidance from a broker or lawyer is crucial to ensure a solid lease agreement that protects the interests of the property owner while meeting the tenant's business requirements.
Step 6: Tenant Retention
Now that you know how to choose a great tenant, you can start building what every commercial property owner hopes will be long-term and profitable relationships.
Tenant retention is critical to maintaining a steady stream of rental income and ensuring business continuity.
While markets and circumstances change over time, tenants that stay in the same location for years at a time often become ‘institutionalized’ into the area and local culture.
We’ve all seen how a popular restaurant closes down and changes the nature of the retail center or high street it used to be a part of. It’s therefore important that landlords see relationships with good tenants as partnerships.
Being a good landlord means attending to tenant concerns and maintenance issues promptly, and making sure that they are happy and satisfied with the property.
Property owners can also create incentives and benefits for tenants to renew their lease.
These could include offering rental discounts for long-term leases, improving amenities and services, or offering referral bonuses to current tenants.
A proactive approach to tenant retention helps to ensure the long-term success of a commercial property.
Final Thoughts on How to Choose Tenants
Choosing the best-fit tenant for your commercial property is a critical decision that significantly impacts long-term profitability.
By using advanced tenant-finding technology and a well-defined tenant selection process, commercial property owners and brokers can minimize vacancies while developing long-lasting, mutually beneficial business relationships.
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