# Office lease renewal probability and capital planning

Canonical: https://chicagocommercialfunding.com/guides/office-lease-renewal-probability-and-capital-planning/
Markdown: https://chicagocommercialfunding.com/guides/office-lease-renewal-probability-and-capital-planning/index.md
Resource ID: office-lease-renewal-probability-and-capital-planning
Published: 2026-10-21
Updated: 2026-10-21
Attribution: Chicago Commercial Funding Editorial
Topic: office
Asset types: Office
Investment stage: Evaluate
Experience level: Intermediate

Renewal probability helps compare expected outcomes; it does not fund a tenant’s departure. Build evidence-based scenarios, correlated rollover cases, and full-event liquidity before choosing reserves.

An office renewal probability is an underwriting assumption about a future tenant decision. It can help estimate expected leasing costs and compare scenarios, but it should not be presented as a verified prediction or used alone to size liquidity. The property needs a funding plan for the full nonrenewal event when it occurs.

Investors should separate the evidence supporting retention, the economic difference between renewal and replacement, and the cash required under each outcome. A tenant’s positive conversation, a published portfolio retention rate, and an executed renewal provide different levels of certainty.

## Define the event and period

State what renewal means in the model. Does it include the same area, contraction, expansion, short extension, option exercise, or a replacement affiliate? Does the probability apply at the next expiry or over the whole hold?

A tenant remaining for three months while relocating is different from signing a five-year extension. A partial renewal can preserve some rent while creating capital and access work in the surrendered portion. Keep outcomes distinct where material.

Use the actual lease calendar and rights. Counsel should interpret options, notice, breaks, and transfer provisions before the analyst assigns a decision date. A probability model cannot create a landlord choice the contract does not provide.

## Build an evidence ladder

Start with tenant business requirements, available financial evidence, payment behavior, service satisfaction, actual space use, ownership changes, competing alternatives, and documented discussions. Identify what is known and what remains provisional.

A verbal intention is weaker than agreed economics; an LOI is different from an executed amendment; an executed amendment may still have delivery or other conditions. Label each stage rather than move directly from interested to certain.

Genuine uncertainty can be expressed through ranges and scenarios. Do not add decimal precision unsupported by evidence. The investment committee should understand why a 60% assumption was chosen and what information would change it.

## Hypothetical expected-cost calculation

Assume a 10,000-square-foot office lease expires in eighteen months. Renewal would require $150,000 TI and $30,000 commission. Replacement would require $600,000 TI, $80,000 commission, and $70,000 vacant carry. Ignore lost rent initially to isolate direct listed spending.

At an illustrative 70% renewal probability, expected direct cost is `$180,000 × 70% + $750,000 × 30% = $351,000`. At 40% renewal probability, it becomes `$180,000 × 40% + $750,000 × 60% = $522,000`.

Neither amount funds the $750,000 replacement event by itself. The owner needs to identify the difference through reserves, retained cash, committed equity, or other genuinely available sources. Add lost rent, debt, concessions, and other costs in the full model.

## Do not treat portfolio retention as a tenant probability

A public company’s retention statistic summarizes a defined population and period. Exclusions, area weighting, early renewals, development, repositioning, and direct subtenant leasing can affect the number. It is not automatically the probability that the subject tenant stays.

A Rexford filing, although industrial rather than office, explicitly describes exclusions in its retention measure. It is useful methodological evidence of why definitions matter, not a retention benchmark for Chicago office. [Rexford retention-definition example](https://www.sec.gov/Archives/edgar/data/1571283/000157128325000038/rexr-20250630.htm).

Use property-specific evidence first. Published data can help frame questions, but the tenant’s actual rights, alternatives, and requirements drive the investment decision.

## Separate cost severity from likelihood

A tenant with a high chance of staying can still create a severe loss if it leaves. A lower renewal probability can be manageable in flexible space with low replacement capital and strong supported demand. Rank both dimensions.

For each material tenancy, show renewal cost, replacement cost, downtime, rent difference, and maximum cumulative deficit. A single expected-cost number hides whether risk comes from probability or an expensive realized outcome.

Healthcare Realty’s original filing separates renewal and new-lease improvement commitments. That distinction supports modeling outcome costs independently; its portfolio amounts are not local cost assumptions. [Healthcare Realty 2025 leasing capital](https://www.sec.gov/Archives/edgar/data/1360604/000136060426000018/hr-20251231.htm).

## Model contraction as its own outcome

Suppose the 10,000-square-foot tenant might renew only 6,000 square feet. The owner could preserve some income but need demising, new access, HVAC zoning, measurement changes, and capital for the remaining area. A binary stay-or-leave model can miss this middle case.

Obtain a professional test fit and scope. Compare the tenant’s reduced rent with costs and realistic backfill. Do not assume the surrendered area is independently leasable without work.

Assign probabilities only when useful and supported. Sometimes three explicit scenarios provide a clearer decision than a complex probability tree with speculative inputs.

## Account for correlated decisions

Several tenants can respond to the same employer, industry, parent, location issue, or building-system condition. Their renewal outcomes may not be independent. A property with staggered leases can still face clustered departures.

Run a common-event scenario where relevant. If two large tenants both leave, show simultaneous capital, vacancy carry, lost recoveries, and financing consequences. Do not assume the second replacement can be funded with rent that the first departure removed.

Medical-office groups can also share health-system strategy or infrastructure. Legal tenant count and economic independence should be analyzed separately rather than treated as equivalent diversification.

## Update evidence through a decision calendar

Begin discussions early enough to learn needs and prepare alternatives. Track dates for options, proposals, budgets, work scopes, approvals, and execution. Assign responsibility for each next action.

A probability should change when evidence changes, not simply because the expiration is closer. Record the reason for revisions: tenant growth, contraction, signed relocation, unresolved service problems, or documented agreement on terms.

Keep a history of prior assumptions. It helps identify systematic optimism and improves future acquisition models. Replacing last month’s 80% with this month’s 30% without explanation is weak governance.

## Connect renewal planning to service and capital

Some retention issues may be addressable through ordinary maintenance or a targeted improvement. Others reflect a business decision the landlord cannot control. Identify the cause before offering expensive concessions.

Price any work with a defined scope and consider residual usefulness. A $100,000 improvement is not justified merely because it might improve probability by an unsupported amount. Compare the complete renewal package with realistic replacement.

Hudson Pacific’s original filing separately reports new and renewal leasing costs. Its defined categories reinforce the need to compare whole outcomes rather than assume every retained tenant is low capital. [Hudson Pacific leasing-cost disclosure](https://www.sec.gov/Archives/edgar/data/1496264/000148251225000043/hpp-20250331.htm).

## Chicago replacement evidence sets the downside

Use current competing spaces, qualified broker input, tenant requirements, and contractor scope for the actual asset. A Loop tower, suburban office suite, and neighborhood professional building can have very different alternatives.

Do not use a metropolitan vacancy headline to assign a precise renewal probability or downtime. It can frame context, but it does not establish which space a particular tenant will choose or what the landlord must spend.

Verify the actual municipality and private rights if a different use or subdivision is proposed. The replacement case needs legal, physical, and commercial feasibility, not just a projected rate.

## Overlay debt and cash requirements

Loan maturity, reserve conditions, cash management, and leasing approvals can change the owner’s ability to fund a departure. Ask the actual lender how it recognizes renewals, options, concessions, and uncommenced leases.

A refinance due during uncertain rollover can create a proceeds gap alongside leasing costs. Model that combined case and identify a credible fallback. Do not assume a future extension or investor contribution is automatic.

Show minimum unrestricted cash and maximum deficit under each outcome. Expected cost is useful for planning, while full-event liquidity protects the property when the less likely outcome occurs.

## Use probabilities to improve decisions

A decision sheet should show evidence, rights, outcome economics, likelihood ranges if supportable, capital sources, deadlines, and actions. It should identify what additional information would change the recommendation.

Compare expected return with downside capacity. An owner can accept uncertainty at an appropriate price and reserve, but should not describe it as certainty because a weighted spreadsheet produces a smooth average.

The practical purpose of renewal probability is to make uncertainty explicit and actionable. The investment remains sound when the owner can both explain the expected outcome and fund the property if the tenant chooses another path.

## Document the decision that the probability supports

Write down the action associated with each revised renewal assumption. A decline from 70% to 40% should trigger a review of marketing readiness, available cash, scope pricing, and decision dates; it should not merely change a colored dashboard cell. Confirm which preparations are reversible and which commit capital before the tenant decides. A preliminary test fit may be useful in both outcomes, while demolition could impair a viable renewal.

Keep the conditional costs consistent. If the replacement case includes a roof project also required on renewal, include that project in both cases or explain its timing difference. Otherwise the model attributes ordinary building investment to tenant departure and overstates the economic benefit of renewal. Ask a second reviewer to reconstruct the weighted calculation and identify the full amount needed in the least favorable executable outcome. Funding that outcome is a different decision from believing that it is most likely.

Document each assumption revision with its date, evidence, decision owner, and funding consequence.

## Source registry

- [Rexford 2025 retention definition and exclusions](https://www.sec.gov/Archives/edgar/data/1571283/000157128325000038/rexr-20250630.htm): accessed 2026-10-21
- [Healthcare Realty 2025 new versus renewal leasing capital](https://www.sec.gov/Archives/edgar/data/1360604/000136060426000018/hr-20251231.htm): accessed 2026-10-21
- [Hudson Pacific 2025 new versus renewal leasing costs](https://www.sec.gov/Archives/edgar/data/1496264/000148251225000043/hpp-20250331.htm): accessed 2026-10-21

## Related resources

- [A Chicago investor’s guide to office and medical-office investment](https://chicagocommercialfunding.com/learn/office/)
- [Building systems: HVAC, elevators and office capital exposure](https://chicagocommercialfunding.com/guides/building-systems-hvac-elevators-and-office-capital-exposure/)
- [Evaluating office concessions and net effective rents](https://chicagocommercialfunding.com/guides/evaluating-office-concessions-and-net-effective-rents/)