Commercial property owners and investors have long favored national tenants over local ones, believing that established brand recognition and corporate backing translate to lower risk. The conventional wisdom suggests that a McDonald’s or Starbucks lease offers more security than a family-owned restaurant or boutique. However, this perspective oversimplifies a complex reality. Recent market shifts, changing consumer preferences, and economic disruptions have challenged the notion that national tenants are inherently safer bets.

This analysis examines why property owners should reconsider their bias toward national tenants and take a more nuanced approach to tenant selection and risk assessment.

The Perceived Safety of National Tenants

National tenants traditionally offer several apparent advantages:

• Financial Stability: Corporate backing and substantial cash reserves supposedly ensure rent payments even during difficult economic periods.
• Brand Recognition: Established brands attract consistent foot traffic and can serve as anchor tenants.
• Standardized Lease Terms: Professional real estate departments often provide streamlined processes and standardized leases.
• Long-Term Commitments: Many national chains sign longer leases with predetermined escalation clauses.

These benefits have led many property investors to favor national tenants, sometimes accepting lower rental rates in exchange for perceived security.

The Hidden Risks of National Tenants

Despite these apparent advantages, national tenants present several distinct risks that property owners often overlook:

1. Vulnerability to Broad Market Shifts

National chains typically follow standardized business models with limited flexibility. When market conditions change dramatically—as demonstrated during the COVID-19 pandemic—many national retailers and restaurant chains declared bankruptcy or closed thousands of locations simultaneously. Brands like JCPenney, GNC, and Chuck E. Cheese filed for bankruptcy protection, while others like Starbucks, Gap, and Macy’s executed massive store closure plans.

2. Ruthless Portfolio Optimization

National tenants routinely analyze store performance data across their entire portfolio. Underperforming locations are quickly identified and targeted for closure, regardless of lease terms. When a national chain decides to exit a market or change its business model, property owners can suddenly face vacancies across multiple properties.

3. Leverage in Lease Negotiations

Large companies leverage their size during lease negotiations and renewals. They often demand significant tenant improvement allowances, reduced rents, or early termination options. If a property owner refuses these terms, the national tenant can simply walk away, knowing that another landlord may be willing to accommodate their demands.

4. Homogenization and Reduced Property Value

Properties dominated by cookie-cutter national tenants lack distinctive character and may struggle to create a unique identity that attracts visitors. This homogenization can limit long-term appreciation and make properties vulnerable to changing consumer preferences, particularly as younger generations increasingly favor authentic, local experiences.

The Underestimated Value of Local Tenants

Local businesses offer several advantages that property owners should consider:

1. Community Integration and Commitment

Local business owners typically have deep ties to their communities. They’ve invested not just financially but emotionally in their locations. This connection creates a powerful incentive to succeed and remain in place, even through challenging economic periods. When difficulties arise, local tenants often show remarkable resilience and willingness to adapt rather than simply closing shop.

2. Operational Flexibility

Local businesses can quickly adjust their offerings, hours, and business models to meet changing market conditions. During the pandemic, many local restaurants pivoted to takeout models or created outdoor dining spaces within days, while national chains required weeks or months to implement corporate-approved changes.

3. Distinctive Character and Place-Making

Properties featuring unique local businesses often develop distinctive identities that attract visitors specifically seeking authentic experiences. This distinctiveness can result in higher foot traffic and increased property values in the long term, particularly in mixed-use developments and urban centers.

4. Tenant Diversification

A mix of local tenants provides natural diversification. If one business struggles or closes, the impact is limited compared to losing a major national tenant that might occupy a significant portion of a property.

Balancing Risk Through Tenant Diversification

The most prudent approach for property owners is to develop a balanced tenant mix that includes both national and local businesses. This strategy provides several benefits:

• Complementary Risk Profiles: Different types of tenants face different risks, creating natural hedging.
• Cross-Traffic Generation: National brands can draw initial traffic while local businesses provide unique experiences that encourage repeat visits.
• Staggered Lease Terms: Varied lease expiration dates minimize the risk of simultaneous vacancies.
• Market Responsiveness: The combination allows properties to remain responsive to changing consumer preferences.

Due Diligence Considerations

When evaluating local tenants, property owners should focus on:

1. Business Fundamentals: Review business plans, financial statements, and operational history.
2. Industry Experience: Assess the tenant’s experience and track record in their specific industry.
3. Community Reputation: Evaluate local reviews, community engagement, and existing customer base.
4. Growth Strategy: Understand the tenant’s vision for sustainable growth and adaptation.

Conclusion

The assumption that national tenants always represent lower risk than local ones is increasingly outdated in today’s dynamic market environment. Property owners who dismiss local businesses based on outdated risk perceptions may miss valuable opportunities and expose themselves to concentration risk.

A thoughtfully curated tenant mix that includes both established national brands and vibrant local businesses provides the best foundation for long-term property value appreciation and resilience against market disruptions. This balanced approach recognizes that risk comes in many forms, and diversification—not just perceived brand stability—is the true key to sustainable returns in commercial real estate.