Commercial real estate is a diverse and dynamic sector that caters to a wide range of tenant types, each with unique characteristics, financial profiles, and leasing requirements. Understanding the distinctions between the many different types (e.g. mom and pop, seasonal, credit) is crucial for property owners and investors in making informed decisions, managing risk, and optimizing returns. By carefully evaluating the various tenant types and their potential impact on rental income stability, tenant turnover, and property value, landlords can strategically assemble a tenant mix that aligns with their investment goals, risk tolerance, and property management preferences.
6 Main Types of Commercial Real Estate Tenants
Not all commercial tenants are equal. Most commercial tenants can be broken down into different categories. Commercial real estate landlords care about these categories because it is how they can make a preliminary assessment of a given tenant’s risk of defaulting on their lease obligations. Below we take a look at the 6 major types of commercial real estate tenants.
Mom and Pop Tenants
“Mom and pop” tenants refer to small, independently-owned businesses that are typically run by a family or a small group of individuals. These tenants contrast with larger corporate or franchise operations, as they usually have a localized presence and lack the financial resources and credit ratings of their larger counterparts. Mom and pop tenants can include small retail storefronts, local restaurants, neighborhood service providers, and boutique shops.
While mom and pop tenants might not have the same financial stability as credit tenants, they can offer unique benefits to landlords and property owners. These small businesses can contribute to a diverse tenant mix, support the local economy, and foster a sense of community within a commercial property or neighborhood. However, landlords should be aware of the potential risks associated with leasing to mom and pop tenants, such as higher tenant turnover, increased financial instability, and potentially lower rental rates. Conducting thorough financial assessments and obtaining personal guarantees or higher security deposits can help mitigate these risks.
Seasonal tenants refer to businesses that lease a commercial property for a specific, limited time period, typically coinciding with peak demand during a particular season. These tenants often operate in industries that experience fluctuations in customer traffic and sales due to seasonal trends, such as holiday retailers, summer food and beverage vendors, or winter sports equipment stores.
Seasonal tenants can provide landlords with an opportunity to generate additional income by filling vacant spaces temporarily, especially during high-traffic periods when demand for certain goods or services is at its peak. However, property owners should be aware that relying on seasonal tenants may result in higher tenant turnover and potential vacancies during the off-season.
Short Term Tenants
Short-term tenants refer to businesses that lease a commercial property for a relatively brief period, typically ranging from a few weeks to several months. These tenants often have temporary needs for space, such as for a pop-up shop, a limited-time promotional event, or a temporary office space while their primary location is under construction or renovation.
Short-term tenants can offer benefits to property owners by filling vacancies and generating additional rental income. However, landlords should be prepared for the higher tenant turnover, increased property marketing efforts, and more frequent lease negotiations associated with short-term tenancies. Additionally, property owners may need to be more flexible with lease terms and space customization to accommodate the unique requirements of short-term tenants.
Non-credit commercial tenants refer to businesses that lack a strong credit history or financial track record, which could potentially increase the risk of default on lease payments or other financial obligations. These tenants might be startups, small businesses, or companies experiencing financial difficulties, and they often have a limited or no credit rating from major credit-rating agencies. They are usually owned by a corporation and can even have several locations or be an already established business, just without the credit history.
Leasing commercial properties to non-credit tenants can present both risks and opportunities for landlords. On one hand, these tenants might offer higher rental rates or accept less favorable lease terms in exchange for securing a space. On the other hand, the risk of default or late payments is higher compared to creditworthy tenants, which could lead to financial instability for the property owner. It is essential for landlords to carefully assess the financial stability and business prospects of non-credit tenants before entering into lease agreements and to consider obtaining additional security measures, such as higher security deposits or personal guarantees, to mitigate potential risks.
Credit tenants in commercial real estate (also sometimes referred to as “National Tenants”) refers to large corporations who are rated as investment grade by credit rating agencies, due to their substantial size and financial stability. They are usually publicly traded companies and can be nationwide or regional to the area. These tenants often have a well-established track record of financial performance, making them reliable and low-risk occupants for leased properties. Depending on the size, they are typically rated by major credit-rating agencies such as Standard & Poor’s, Moody’s, or Fitch Ratings.
Credit tenants are highly sought after by landlords and property owners because they pose a lower risk of defaulting on lease payments or other financial obligations. This reliability can lead to more stable rental income, lower tenant turnover, and a higher likelihood of renewing leases. Additionally, properties with credit tenants can be more attractive to lenders and investors, as they are associated with a reduced risk profile and potential for consistent cash flow. Examples of credit tenants include large corporations, government agencies, and national retail chains.
Government tenants refer to federal, state, or local government agencies and organizations that lease commercial spaces for various purposes. These tenants can occupy a wide range of property types, such as office buildings, industrial facilities, and retail spaces, depending on the specific functions and requirements of the government entity. Government tenants are often considered highly desirable by landlords and property owners due to their strong creditworthiness, financial stability, and long-term leasing potential. Since government agencies are backed by public funds, they are less likely to default on lease payments or other financial obligations. This reliability can lead to more stable rental income and lower tenant turnover.
In addition to financial stability, government tenants can also contribute to the local economy by creating jobs and attracting related businesses to the area. However, landlords should be aware of potential downsides, such as lengthy lease negotiation processes, strict regulatory requirements, and the potential for budgetary constraints that may impact lease renewals or maintenance commitments.
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Commercial Tenant FAQ
How to Screen Commercial Real Estate Tenants?
Properly screening commercial real estate tenants is a very important first step in ensuring the success and stability of a commercial property. It involves a thorough evaluation of potential tenants to assess their financial stability, business longevity, and overall fit for the property. For instance, landlords often examine a business’s financial statements, credit reports, and past leasing history to gauge their ability to meet lease obligations. Additionally, personal interviews and reference checks can provide insights into the tenant’s business practices and reputation in the industry.