See the exit signs before your tenants do, with data-driven insights In the ever-evolving landscape of commercial real estate, the ability to predict and mitigate the risk of tenants vacating a property is invaluable. For large commercial real estate owners, leveraging data is not just a strategic advantage; it’s a necessity to stay ahead in a competitive market. There are three critical types of data that can serve as indicators of a tenant’s likelihood to leave a building: usage data,financial data, and leasing data. 1 Real-world impact and recent trends Recent data has shown that the U.S. office space vacancy rate has hit record highs, with 18.6 percent of office space available for rent, the most since tracking began in 1995. This trend underscores the challenges property owners face in leasing office spaces. High vacancy rates can lead to a domino effect, where the perceived desirability of a building decreases, potentially leading to more tenants leaving. In New York, for example, the office-vacancy rate is around 22 percent, the highest recorded since market tracking began in 1984. This has led to over 128 buildings in Manhattan alone listing more than 200,000 square feet of space as available for lease. The implications of such high vacancy rates are profound, affecting not only property owners but also the financial institutions that back commercial mortgages. 2 Usage data: The pulse of tenant activity Usage data encompasses information from systems that tenants interact with daily, such as access control systems, energy meters, and work order systems. These data points offer real-time insights into the operational patterns of tenants. A sudden decrease in energy consumption or fewer keycard swipes at the entrance could signal a reduction in on-site staff, suggesting that a tenant may be considering downsizing or not renewing their lease. For instance, if a tenant’s employees are increasingly working from home, the need for physical office space diminishes, posing a downsizing risk for property managers. 3 Financial data: Gauging tenant stability Financial data, provided by agencies like Dun & Bradstreet and Moody’s, offers avwindow into the financial health of a company. These agencies assess the likelihoodvof a business facing financial difficulties or even going bankrupt. A downgrade in a tenant’s credit rating could be a precursor to them needing to cut costs, which may include downsizingvtheir office space. This type of data is a strong indicator of a tenant’s failure risk, which can have significant implications for property owners. 4 Leasing data: Understanding impact Leasing data, including rent rolls and leasing activity reports from companies like Costar, can help property managers understand the potential impact of a tenant’s departure. For example, a tenant responsible for a substantial portion of the building’s income poses a greater financial risk if they leave compared to a smaller tenant. Moreover, industry leasing activity data can reveal if a tenant is actively seeking new premises, has signed a lease elsewhere, or is reducing their footprint in other locations. This information is crucial for assessing the risk of tenant turnover. 5 Conclusion For commercial real estate owners, the integration of usage, financial, and leasing data into their risk assessment models is not just about understanding current tenant behavior. It’s about forecasting future movements and being prepared to proactively manage the property portfolio. By harnessing the power of data, property managers can not only anticipate potential risks but also devise strategies to retain tenants and attract new ones, ensuring the long-term profitability and sustainability of their investments.