How can landlords reduce tenant default risk?

Use comprehensive screening, secure appropriate deposits, and include strong protective clauses in the lease agreement.

Do online reviews matter in tenant screening?

Yes. A business's online reputation often reflects its customer satisfaction and operational stability.

How do I know if a tenant is the right fit for my property?

Evaluate their operational needs, industry type, space compatibility, and how well they align with other tenants in the property.

Are startups risky tenants?

Startups can be higher risk but may still be viable with proper screening and strong lease protections.

Should property managers screen tenants for landlords?

Yes. Professional property managers have the expertise to conduct detailed screening and catch red flags early.

How to Choose the Right Tenant in 2026: Screening, Red Flags, and ROI Protection

Q: What is the most important factor when choosing a tenant in 2026?

Financial stability and consistent cash flow remain the top indicators of a strong commercial tenant.

Q: Should landlords require personal guarantees?

Yes. Personal guarantees help protect owners from financial loss, especially when tenants are new or have limited history.

gloryanng8
Jan 22
4 min read

Choosing the right tenant is one of the most critical decisions a commercial property owner can make. In 2026—amid shifting economic conditions, evolving retail trends, and rising vacancy pressures—tenant selection is no longer just about “who can pay rent.” It’s about reducing long-term risk, improving property stability, and safeguarding ROI in an unpredictable market.

A strong tenant can increase property value, support long-term occupancy, and reduce operating issues. A weak tenant can cause missed payments, high turnover, legal disputes, and costly vacancies.

This guide outlines exactly how to choose the right tenant in 2026, the red flags to watch out for, and strategies to protect your investment.

Why Tenant Selection Matters More Than Ever in 2026

Southern California’s CRE market is entering a new cycle. Tenant expectations are changing. Leasing strategies are evolving. Landlords need to be more strategic—not more lenient—about who they accept.

Key 2026 challenges include:

✔ Rising operational costs

✔ Slower retail recovery in some submarkets

✔ South Bay office and industrial reshuffling

✔ Higher tenant improvement (TI) budgets

✔ Increased demand for flexible leasing

Understanding how to evaluate tenants effectively has a direct impact on your financial performance.

Learn more about navigating the market:

👉 Retail Leasing in the South Bay for 2026: What Tenants & Landlords Should Be Watching

Step 1 — Conduct Comprehensive Financial Screening

The first—and most important—indicator of a tenant’s viability is their financial stability.

What to request:

✔ Business credit reports

✔ Bank statements (3–12 months)

✔ Profit and loss statements

✔ Balance sheets

✔ Tax returns (1–2 years)

✔ Proof of funding for TI or initial costs

✔ Accounts payable/receivable aging reports

What to look for:

Stable revenue trends
Adequate cash reserves
Low debt-to-income ratio
Timely payments to vendors

This reduces the risk of default, early move-out, or operational instability.

Learn more about ROI protection through proper management:

👉 Property Management Essentials: How to Maximize ROI

Step 2 — Evaluate the Business Model & Industry Strength

Not all industries are performing equally in 2026.

Industries showing strength in SoCal:

✔ Healthcare and wellness

✔ Logistics & industrial

✔ Specialty manufacturing

✔ Mixed-use compatible retail

✔ Food & beverage (experience-driven)

✔ Professional services

Industries showing higher risk:

⚠️ Traditional office-heavy sectors

⚠️ Apparel retail

⚠️ Oversaturated beauty services

⚠️ Trend-dependent startups

High-risk industries aren’t automatic disqualifiers—but require deeper screening.

See how different CRE sectors are evolving:

👉 Why Mixed-Use Properties Are the Future of Commercial Real Estate

Step 3 — Assess Operational Stability and Business History

Look beyond the financials and evaluate:

✔ Years in business

A business operating 5+ years typically has a stable customer base.

✔ Management experience

Strong leadership reduces operational mistakes.

✔ Business plan and growth forecast

Ambitious—but unrealistic—plans can indicate instability.

✔ Reason for moving

Strategic growth = good. Eviction or financial stress = red flag.

Tenant retention matters:

👉 How to Maximize Tenant Retention in Commercial Properties

Step 4 — Review the Tenant’s Online Reputation & Digital Footprint

In 2026, online presence tells you everything.

Check:

✔ Google reviews

✔ Yelp reviews

✔ BBB filings

✔ Website professionalism

✔ Social media activity

✔ Customer complaints or legal issues

A tenant witha strong community reputation is more likely to thrive.

Step 5 — Evaluate Space Fit & Operational Compatibility

Does the tenant’s use align with:

✔ zoning

✔ parking requirements

✔ utility needs

✔ neighborhood expectations

✔ co-tenant synergy

✔ property layout

✔ ventilation or noise restrictions

Choosing a tenant that fits the property is as important as choosing one who can pay.

Learn more about finding the right match:

👉 Finding the Perfect Office Space in Southern California

Red Flags to Watch Out for During Tenant Screening

Not all red flags are dealbreakers—but many indicate higher risk.

🚩 Unstable revenue patterns

🚩 Negative online customer reviews

🚩 Inconsistent financial documents

🚩 Lack of industry experience

🚩 Previous eviction or lease disputes

🚩 Poor communication or evasiveness

🚩 Request for too many concessions

🚩 No business plan or unclear operations

For more potential pitfalls, see:

👉 Why Securing the Right Lease Can Be Riskier Than You Think

Step 6 — Protect Your ROI Through Strong Lease Terms

A tenant is only as good as the lease protecting your property.

Key protections to include:

✔ Personal guarantees

✔ Security deposits or letters of credit

✔ Rent acceleration clauses

✔ Usage restrictions

✔ Maintenance obligations

✔ Annual financial reporting requirements

✔ Defined default and cure periods

✔ CAM structure clarity

Many landlords lose money simply due to weak lease agreements.

Learn more about protecting your investment:👉 Why Professional Property Management Is Key to Long-Term Growth

Effective Tenant Screening Protects Long-Term ROI

A strong tenant provides:

✔ predictable rent

✔ lower turnover

✔ fewer disputes

✔ reduced maintenance costs

✔ increased property value

✔ long-term occupancy stability

This is the foundation of CRE profitability in 2026.

FAQs

1. What is the most important factor when choosing a tenant in 2026?

Financial stability and consistent revenue are the top indicators of success.

2. Should landlords require personal guarantees?

Yes—especially for new or small businesses.

3. How can landlords reduce the risk of tenant default?

Require strong screening documents and include protective lease clauses.

4. Do online reviews really matter when screening tenants?

Absolutely. Reputation impacts customer traffic and long-term success.

5. How do I know if a tenant is a good “fit” for my property?

Evaluate their operational needs, zoning compatibility, and co-tenant synergy.

6. Are startups too risky as tenants?

Not always—but they require deeper screening and stronger lease protections.

7. Should a property manager handle screening?

Yes. Professionals identify issues that owners often overlook.

Protect Your Investment With RPM Commercial’s Tenant Screening Expertise

Strong tenants create strong portfolios. Let our experts help you evaluate, screen, and secure the best tenants for long-term stability.

📞 Contact RPM Commercial Real Estate Services

🌐 www.rpmres.com