With evolving demands for office space, companies are increasingly questioning whether their current premises still meet their requirements in terms of size, layout, and sustainability—and what the potential costs would be to relocate to an alternative site.
Whether a tenant chooses to remain or move to a new location is highly relevant for property owners, as a departure can have significant ramifications for the asset. The exit of a single-tenant may necessitate a complete repositioning of the property, including substantial refurbishment works. In other scenarios, it opens up opportunities to carry out overdue renovations or to re-let the space at higher rents in response to changing market conditions. For these reasons, it is crucial to proactively address expiring leases well in advance.
Below, we outline the considerations property owners must take into account and how to prepare for them during the lease term.
Given the heterogeneity of real estate assets, each case must be assessed individually. While variables such as micro-location, building specifications, and market cycles play a key role, the strategic analysis of lease renewals adheres to a proven framework based on four essential questions:
- What are the costs associated with a possible tenant departure?
- What are the consequences if the tenant stays?
- What opportunities might arise from a tenant’s exit?
- What is the current market backdrop, and how does my property perform in this competitive environment?
A holistic view of turnover costs
The true costs of tenant turnover are frequently underestimated. Owners often account mainly for vacancy and refurbishment costs, but our comprehensive cost analysis paints a much more nuanced picture.
To illustrate this, let’s review a typical scenario: a 500 m² office space in Zurich with an annual rent of CHF 500/m². The existing tenant has a non-binding extension option and is proposing a new workplace concept as part of a renewal, requesting three months of rent-free period and a lump-sum contribution of CHF 50,000 toward fit-out costs (CHF 100/m²). In total, these incentives amount to CHF 90,000—representing roughly one-third of the annual net rental income.
Refurbishment and modernization costs following a tenant change can vary significantly depending on the age and condition of the premises. Basic works such as painting, floor repairs, and minor structural adjustments generally range from CHF 80 to CHF 150 per m². For technical upgrades, such as HVAC modifications, costs can quickly escalate to CHF 500 or more per m². In our scenario, we are assuming only minor works at CHF 100 per m², totaling CHF 50,000 for the 500 m² area.
During the typical 4–8 week refurbishment period, all operating expenses continue to accrue without any rental income. For a 500 m² office in Zurich at CHF 500/m²/year and a six-week refurbishment, vacancy costs amount to approximately CHF 30,000. Additionally, service charges (assumed at CHF 50/m²/year) cannot be charged during this period, resulting in a total gross rent loss of CHF 34,375.
Depending on the attractiveness of the space and its location, as well as overall market conditions, the actual marketing period may vary. For this example, we assume an additional three months for marketing, during which the owner foregoes rental income of CHF 63,000 and is responsible for non-recoverable service charges of around CHF 6,000.
Successful re-letting often entails third-party costs, unless included in an existing property management agreement or if the owner opts to outsource marketing activities. Preparing marketing materials (floorplans, photography, brochures), as well as listing fees, are estimated at CHF 10,000 in our scenario, borne by the owner. In addition to marketing expenses, a brokerage fee of roughly 8–12% of annual rent applies; assuming 10%, this adds CHF 25,000.
Current market conditions typically involve incentives for new tenants. While these vary depending on asset and location quality, for this example we anticipate two months’ rent-free on a five-year lease.
This example demonstrates that the costs associated with re-letting—at CHF 228,125—account for over 90% of the annual net rent of CHF 250,000, and are significantly higher than those of retaining the tenant.
A purely cost-driven approach would be too simplistic, however; it is vital to evaluate the marketability of the space and the asset against current market requirements. Since costs represent only one component of the overall picture, a holistic analysis incorporating the following questions is necessary:
- Do the existing tenant’s rental terms reflect current market rates?
- What is the overall condition of the leased space and the building?
- What are the prospects for re-letting the affected area, and what works would be required—whether to the space or potentially the entire property—to ensure competitiveness?
- What reputational risks could arise from prolonged vacancy?
Depending on the size and location of the affected space, a departure could also present opportunities—such as creating more attractive contiguous units or enabling a change of use.
To avoid last-minute surprises, it is essential to evaluate potential strategies and initiate preliminary planning well before lease expiry. Early analysis helps prevent situations where an unexercised extension option is only discovered a year before lease end.
Communicating with the tenant
As illustrated above, losing a tenant can have significant cost implications, coupled with vacancy and reputational risks. To position yourself favorably for an upcoming lease renewal, it is essential to understand the tenant’s perspective and requirements. This is only possible through regular communication between the landlord or property manager and the tenant.
In addition to at least annual discussions at a senior management level, it is important to gather tenant insights across all operational levels as part of active asset, property, and facility management initiatives. This ongoing dialogue also provides indications of the likelihood of tenant retention.
For tenants with a nationwide footprint, it is equally important to consider the wider portfolio, not just the single property. Tenant issues in one asset may affect leasing decisions in other buildings owned by the same landlord.
The property as a point of identification
Increasingly, companies identify with a location and the property itself. When searching for premises, tenants filter potential options based on defined criteria: some value comprehensive services such as staffed receptions, coffee bars, or conferencing facilities, while others prioritize proximity to train stations or exclude buildings lacking specific sustainability certifications.
However, the quality and appearance of the building matter not just at the point of selection. As the relationship with the building strengthens over time, it becomes critical that the asset is subject to ongoing evaluation, and that necessary actions are taken when required. This entails not only technical upgrades, but also improvements to presentation and attention to tenant feedback from surveys.
If a tenant is no longer able to identify with the property and perceives only “issues” the likelihood of the extension option being exercised diminishes markedly. For long-term relationships especially, owners must avoid a false sense of security and actively focus on continual improvement and future positioning, even during contracted lease periods.
Conclusion: Competitive advantage lies in strong tenant relationships
A tenant’s decision to stay or leave has profound financial impacts for property owners. As the calculations illustrate, re-letting costs can easily reach or exceed the value of an annual net rent, making them substantially higher than retaining a tenant.
Yet, focusing solely on costs is not sufficient. The main priority should be a comprehensive assessment that accounts for both market conditions and the long-term strategic positioning of the asset. Above all, success hinges on proactive tenant engagement—regular dialogue, structured tenant surveys, and active asset management enable early identification of needs and implementation of timely measures.
Property owners who systematically and proactively address upcoming lease expiries can not only avoid costly surprises, but also secure and enhance the long-term appeal of their buildings. Taking a forward-looking approach pays dividends—both financially and in ensuring the sustained marketability of the asset.