New tenants or lease renewals – What’s best for me as a landlord in an improving economy?

This is one of the most important leasing questions we answer for property owners to help them know how far they should be willing to stretch to make a deal.

The stock market is at record highs, transactions are up, investment cap rates are low, and banks are lending again. These welcome trends would seem to indicate that new tenants are where the money is, even if you have to let existing tenants go. Tenants are becoming more optimistic about growth, and it seems that we should do whatever it takes to capture that growth and higher rental rates.

True analysis shows time and time again, however, that retaining existing tenants -- even under less favorable terms -- is the greater value.

How can this be true?

The reality in the marketplace is always the true indicator. In the Kansas City market, rental rates for new leases and renewals are still virtually equal. Renewals, however, require less capital and no downtime, avoiding two potential value killers -- factors that quickly offset potential higher rents from new leases. In any analysis, the truth is that you can almost never make up the lost cash flow due to the combination of downtime and the increased capital cost of building out new space. If you have to rebuild the same space every five years for a different user, you will never win.

So what can landlords do to be in the best position to retain existing tenants?

We’ll answer that in next month’s column. Don’t miss it!