Tenant Satisfaction and Commercial Building Performance
56 Pages Posted: 12 Feb 2024
Date Written: January 31, 2024
Abstract
Information asymmetry between landlords and tenants can contribute to inefficiency in the real estate market. For example, the satisfaction of tenants with a building is typically private information that is opaque to the landlord. However, this information could be an indicator of demand for office space, both at the extensive and intensive margin, and as such be critical for landlords. In this study, we examine the role of tenant satisfaction surveys in predicting tenant leasing decisions and the financial performance of commercial properties. We compile a unique dataset, combining a widely used tenant satisfaction survey on office tenants with rental contracts retrieved from CoStar, to estimate how tenant satisfaction shapes demand for office space. We document that a 1-point increase in tenant satisfaction (on a Likert scale of 1 to 5) is associated with an 8.6% higher willingness to renew the lease, an 11.5% higher likelihood to recommend the property to prospective tenants, and a 14.6% lower probability of moving out of the property. Importantly, the financial performance of assets is also affected by tenant satisfaction: a 10% higher building-level satisfaction among the tenants in the building is associated with a 0.2% higher growth in gross rents, a 0.9% higher growth in effective gross rent and a 0.3% drop in the vacancy rate change. The results from a mediation model indicate that sustainability attributes and better property management could improve tenant satisfaction and affect tenant decisions. Our research has implications for customer relationship management in the real estate sector, and shows the potential to incorporate surveys in the prediction of commercial real estate performance.
Keywords: Information asymmetry, Tenant satisfaction, Financial performance
JEL Classification: R30, R32, R33, M31
Suggested Citation: Suggested Citation