Tenant Satisfaction On the Rise Across All Sectors

John Falco

In 2018, Kingsley Associates surveyed more than 2 billion square feet of office, industrial, medical office, and retail properties across the United States. Across all property types, overall tenant satisfaction increased in the last quarter of 2018, except for the retail sector where satisfaction remained steady.

Kingsley Associates’ data suggests positive relationships and experiences with the property management team lead to greater satisfaction with the tenant experience. While factors such as cost and location are important, managerial problem resolution, communication, service delivery, responsiveness and accommodation of special requests are the most significant factors in tenant satisfaction and therefore highly affect tenant retention as well. Satisfied tenants in all sectors are much more likely to renew their leases when the time comes.

Office

Source: Kingsley Associates

National office tenant satisfaction grew slightly in the fourth quarter of 2018, with a .4 percentage point increase. This increase marks a four-quarter growth period from 84.9 percent of tenants indicating they are satisfied in the first quarter of 2018, to 87.1 percent this past quarter.

The office sector saw the highest satisfaction scores in over two years in this past quarter, but the scores were still unable to reach the levels previously seen in 2014, which ranged from 88.5 percent to 88.9 percent. At its height, satisfaction levels reached 89 percent in the first quarter of 2015. In this past quarter, the most influential drivers or overall tenant satisfaction were management-related factors such as problem resolution, communication, service delivery, responsiveness to tenants and accommodation of special requests.

Individual markets had high satisfaction scores across the board at the end of 2018. Boston, Denver and Washington, D.C., each saw satisfaction scores of 91 percent. Conversely, Miami and San Francisco had the lowest overall satisfaction rates at 86 percent and 85 percent, respectively.

Miami stands out because it is one of the least satisfied markets and on a downward trend, with the second largest decrease in year-over-year tenant satisfaction across the major markets. Miami’s satisfaction score has decreased 1.6 percentage points since the fourth quarter of 2017. Chicago had the most significant year-over-year decrease in satisfaction with a 2.7 percentage point drop. Seattle and Washington, D.C., set themselves apart by having the highest year-over-year increases with D.C., increasing by 4.9 percentage points, and Seattle increasing by 2.5 percentage points.

Industrial

Source: Kingsley Associates

Overall tenant satisfaction in the industrial sector is relatively volatile compared to the office sector. Over the past five years, overall satisfaction with the tenant experience has ranged from a low of 79.9 percent in the second quarter of 2014 to a peak of 86.9 percent in the third quarter of 2016.

Tenant satisfaction is also generally lower than that of office tenants. The last two quarters of 2018 saw industrial national tenant satisfaction increase from 83.7 percent to 84.5 percent. Similar to office, and other sectors, as will be seen below, key drivers of satisfaction in the industrial sector were tied to management-related areas such as problem resolution and accommodation of special requests in this past quarter.

At the market level, Denver had the highest level of industrial tenant satisfaction with 94 percent of tenants satisfied. Interestingly, Denver’s industrial satisfaction is higher than its office tenant satisfaction, which was only 91 percent. Either way, both sectors are out performing the other markets in overall satisfaction.

Chicago, on the other hand, had the lowest tenant satisfaction level this quarter at 81 percent. This is in addition to a year-over-year decline in satisfaction of -10.1 percentage points from the end of 2017. Miami and Los Angeles also ranked in the bottom, each with 83 percent of tenant satisfied. The largest year-over-year increase was see in Seattle, with a 7.4 percentage point increase.

Medical Office

Source: Kingsley Associates

National levels of overall satisfaction in the medical office sector are currently at an all-time high. There has been an upward trend developing since the first quarter of 2017. While little there is generally little variability from quarter to quarter in the medical office sector, this past quarter saw an increase of 0.8 percentage points from 84.4 percent in the third quarter to the current high of 85.2 percent satisfied.

Medical office tenants in Miami are the most satisfied in comparison to the other major markets with a 96 percent satisfaction rate, and relatively minimal year-over-year decrease of 0.7 percentage points. Washington, D.C., was the least satisfied market this quarter with only 76 percent of tenants being satisfied with their tenant experience.

Medical office tenants have similar drivers of overall satisfaction as other sectors such as management responsiveness, communication, and attentiveness to their specific concerns. However, this is only sector that has additional key drivers of overall satisfaction beyond property management at the top of the list. The value that tenant perceive in relation to what they pay for their space highly influences their overall satisfaction.

Retail

Source: Kingsley Associates

In the last five years, there has been little consistency in tenant satisfaction within the retail sector. Retail tenants generally have lower satisfaction scores across the board compared to other commercial property types. There have been several sharp drops and steep increases in retail tenant satisfaction over the years, especially from 71.8 percent in the third quarter of 2014 to 64.2 percent in the first quarter of 2015; a sharp drop of 7.6 percentage points in just six months.

Despite a decrease in satisfaction at the start of 2018 from 73.3 percent in the first quarter to 71.4 percent in the second quarter, the past two quarters have been steady at 72.1 percent of tenants satisfied. In the retail sector, just as in the other sectors, management-tenant relationships are the most important factor of overall satisfaction. Addressing tenant concerns, overall communication, and problem solving are all key parts of the management-tenant relationship. Improving that relationship will drive an overall improvement in tenant satisfaction.

Unlike in the office sector, the retail market in Seattle has one of the lowest overall satisfaction scores compared to other top markets with only 57 percent of tenants satisfied this past quarter. Seattle also claims a staggering year-over-year 14.7 percentage point decrease. The retail sector is Seattle’s least satisfied commercial sector when compared to its standing in office, industrial, and medical office sectors.

New York had the highest overall satisfaction scores in the country with 79 percent satisfied in the fourth quarter of 2018. Washington, D.C., also experienced a substantial positive rise in satisfaction scores with an increase of 10.4 percentage points to a 72 percent satisfaction score.

John Falco is the principal leading Kingsley Associates’ Atlanta office. With more than 25 years of real estate experience in the office, industrial, retail and residential sectors, Falco provides clients with insights into cross-industry trends.