Tenant retention risk
Tenant retention risk is the risk that a tenant moves out when the lease expires, leaving the owner with empty premises and lost rental income. The term is as much about the chance of keeping the tenant as it is about the danger of losing them, and it is used when you assess how stable the cash flow from a building really is. A building can have high rent today but be worth little if the largest tenants are likely to move out at expiry.
The risk rises as the lease approaches expiry, when the tenant is unhappy with the premises or the location, or when market rent has fallen so that the tenant can get better terms elsewhere. An anchor tenant that moves out hits hard: the premises are often fitted out for that specific business, and re-letting can require both refurbishment and a period of vacancy. Tenant retention risk is therefore measured closely against WAULT, which shows the weighted average unexpired lease term in the portfolio. Low WAULT means much of the rent is due for renegotiation soon, and therefore higher tenant retention risk.
When a tenant moves out, several costs arise at the same time. There is a period of vacancy with no rent, the premises often have to be rebuilt for the next tenant (tenant fit-out), and rent incentives such as discount periods may be needed to land a new agreement. Together, this can eat up a whole year's rent or more. The owner reduces the risk by renegotiating well before expiry, spreading the expiry dates across the portfolio so that everything does not fall due at once, and keeping the premises and the building attractive.
Tenant retention risk is a central part of the valuation and of due diligence when buying. A buyer looks not only at today's rent, but at the likelihood that it lasts: the tenants' financial strength, how well the premises suit the business, and how close the leases are to market rent. High tenant retention risk gives a higher required rate of return and therefore a premium on the yield, because the income is more uncertain. Conversely, a building with long leases and financially strong tenants is valued with lower risk and a higher price.
In Placepoint, you can see the tenants in a building alongside property and company information when you assess how stable the rental income is.
From Placepoint's dictionary: Tenant retention risk
More information: Lovdata: husleieloven, SNL: kontantstrøm, SNL: leiekontrakt
English: Tenant retention risk (lease rollover risk).
Frequently asked questions
What is tenant retention risk?
Tenant retention risk is the risk that a tenant moves out when the lease expires, leaving the owner with vacancy and lost rental income. It is about the likelihood of keeping the tenant, and it is decisive for how stable the cash flow from a building is.
How does tenant retention risk relate to WAULT?
WAULT shows the weighted average unexpired lease term in the portfolio. Low WAULT means much of the rent is due for renegotiation soon, and therefore higher tenant retention risk. High WAULT with financially strong tenants gives low tenant retention risk.
What does it cost when a tenant moves out?
A period of vacancy with no rent, often refurbishment of the premises (tenant fit-out), and usually rent incentives to land a new agreement. Together, this can amount to a whole year's rent or more.
How does tenant retention risk affect value?
High tenant retention risk makes the rental income more uncertain and gives a higher required rate of return, that is, a premium on the yield and a lower price. Buildings with long leases and financially strong tenants are valued with lower risk and a higher price.