Retail · Rollover
Renewal Probability Is the Input Nobody Can Give You
On a multi-tenant retail deal, the assumption that moves the return most is the one with the least evidence behind it.
Every strip center model contains an assumption about how often tenants renew. It is usually entered once, near the top, and never revisited. It deserves more attention than that, because the difference between a 30 percent and a 90 percent renewal rate is the difference between a deal that works and one that does not.
What renewal probability actually controls
Three things at once, which is why its effect compounds.
Downtime. A renewing tenant never leaves. A departing one leaves the suite empty for months, six is typical for in-line space, nine or more for a junior anchor, and the clock starts at expiry, not at the point you find a replacement.
Allowance. A renewal costs a few dollars a foot in refresh. A new tenant costs whatever the market requires to build out a raw space, which in current retail is frequently thirty to forty dollars a foot and sometimes far more.
Commission. A renewal commission runs roughly half a new-deal commission, and a new deal often carries a tenant representative share on top.
Move renewal probability from 65 percent to 30 and all three move against you simultaneously. On a typical six-tenant center that swing is worth more than a full percentage point of IRR and can take net present value negative on its own.
How to form a view
There is no data source that will tell you this for a specific center, which is why it gets treated as boilerplate. What you can do:
Look at the tenant's investment in the space. An operator who spent two hundred thousand dollars on a build-out five years ago is far more likely to renew than one who took the space as-is. Look at sales, if the lease gives you reporting. Look at how many locations the tenant has nearby, a chain rationalising a market will close the weakest, and yours might be it. And look at what the tenant would pay elsewhere: a below-market tenant renews, an above-market one shops.
What to do in the model
Do not pick one number. Run the deal at your assumption, then at twenty points below it, and see whether you would still buy. If the answer changes, the renewal assumption is doing more work in your underwriting than the property is, and you should price that.
Model it: Strip Plaza underwriting runs renewal probability against downtime, allowances and commissions across a full rollover schedule.
Related notes
How to read this. These are working notes. Figures come from public reporting and from the models on this site, and market conditions change, check anything time-sensitive against the source before you rely on it. Nothing here is investment, tax or legal advice, and no note is a substitute for diligence on a specific property.
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