Grace Hill

Kendall Pretzer

Regardless of what type of commercial real estate you manage, improvements to tenant satisfaction are central to a healthy bottom line. There is quantifiable evidence of a direct correlation between the contentment of tenants and renewal rates, and higher gross and effective rents, according to a recent study by MIT and Maastricht University.

The way companies do business continues to evolve post-pandemic, and CRE owners face an uphill battle economically as vacancies continue to creep up. There is still a significant segment of the workforce engaged in hybrid or fully remote work environments. This leads to lower demand, higher vacancies, and the likelihood of decreasing rents as supply increases. These changes to commercial office space have convinced tenants to examine not just the quantity of space they lease, but the quality of it as well, which means drivers of satisfaction must be scrutinized by owner/operators.Tenant engagement will prove to be the key to success.

The Importance of Tenant Satisfaction

More than 243 million sq. ft. of office space became vacant in 2022, and the overall vacancy is expected to rise to more than 330 million sq. ft. by 2030, according to the Maastricht/MIT study. This same study revealed a one-point increase in tenant satisfaction could lead to an 18% reduction in move-outs and a 7% reduction in vacancy rates. So, any owner/operator that wants to retain tenants and avoid the negative impacts of rapidly increasing vacancies is going to need a comprehensive understanding of what tenants are seeking.

The number of tenants who plan to renew their leases is currently around 45%, according to recent research conducted by Grace Hill. About 11% of tenants are looking for a larger space, and that number is decreasing. Around 6% are seeking less space and a significant portion — 34% — aren’t sure how much space they’re going to need in the future. This is why it’s imperative to collect, measure and go “all in” on the contentment of tenants.

Logistics real estate developer and investor GLP Europe had previously gauged its tenant approval scores on feedback from bi-annual meetings with customers. Realizing that a more complete picture of the data was required, along with benchmarks to measure results, GLP developed a comprehensive survey program to create a data-driven approach. This not only supplied GLP with the information they needed, but the company also increased tenant satisfaction with a way to measure continuing progress.

Green Leases Are the Future for Corporate Tenants

To remain competitive and retain tenants in their buildings, sustainable practices and ESG are starting to carry much greater weight. Buildings are responsible for nearly 40% of carbon emissions, according to the World Green Building Council. Businesses recognize the effect it has on the global climate, as well as the demands being placed on them to embrace sustainability. More than 40% of surveyed companies believe that employees will require the presence of green and healthy spaces, and 79% say carbon emissions reduction will be a part of their corporate strategy within the next two years.

The research by MIT and Maastricht points to increased benefits for owner/operators when putting a greater focus on sustainability. Green buildings have a 1.3% higher satisfaction score and a 6% higher rent. Based on the results provided by the study, there is evidence that raising scores provides higher income while reducing vacant space. It’s also becoming a requirement for remaining competitive. While only 44% of buildings were considered green in the top 30 U.S. metros, that number has climbed well above 50% in the last four years. With the increased availability of space, commercial buildings that do not provide operational efficiencies through sustainability risk losing out to other more appealing options.

Understanding the growing importance of ESG initiatives (Environmental, Social, Governance) in commercial real estate, RXR Realty created a survey and policy program to improve ESG standards and gather tenant views on heating and cooling, cleaning and security. They were able to achieve higher GRESB scores (Global Real Estate Sustainability Benchmark), an industry-led organization that collects, validates, scores and independently benchmarks ESG data for commercial real estate. These scores can be critical for attracting investors and better overall tenant satisfaction.

Gaining Insight Into Tenant Satisfaction

The only way to fully understand what will increase the happiness of tenants is to gather data from the specific tenants in each building. While there will be some commonality amongst the numbers, different companies are going to have different goals, different timelines and different requirements. Owners and operators need a clear understanding of their tenants’ current and future needs, whether it's green changes or otherwise, rather than taking a cookie-cutter approach to each building.

Tenants have varying needs based on whether they’re running a full-time, in-person office or a hybrid model that only requires space a few days per week. Depending on how they function, some companies might require a different approach to the space they occupy. Some might be seeking a flexible space that can be designed to encourage collaboration, while others might want moveable walls so they can adjust to changing needs. If teams are in the office at different times, reliable tech to remain connected will be a priority.

Lillibridge Healthcare Services created a comprehensive survey program that gave them a greater understanding of satisfaction rates among their 14,000 tenants. Lillibridge was seeking data on overall management, engineering, leasing satisfaction and renewal intentions. Lillibridge credits this program for providing the knowledge the company needed to make informed changes, thereby raising overall tenant satisfaction by over 16%.

To truly understand the needs of tenants, ongoing communication is a must, and one of the best approaches to this is to deploy surveys to see where the commonality and uniqueness of needs are for your tenants. This is the optimal approach you need to gain the data needed to remain competitive in CRE, as well as ongoing assessment of changing tenant preferences.

This shift in the way we approach the use of commercial space is likely to continue for some time. Many businesses would like to see their office staff fully in person again, but more employees are realizing the benefits of remote and hybrid modes of work. A thoughtful, data-driven analysis of your current tenants’ needs is crucial to keep occupants and understanding usage in this new model.