A Strong Tenant Does Not Automatically Make a Strong Asset
By Doug Parker, Montbart
First published 10th September 2026
How a more selective market is changing the questions buyers and lenders ask
For a long time, one of the first questions asked about an income-producing commercial property was a very simple one: who is the tenant?
Now, I’m not suggesting the whole landscape has changed, and tenant covenant strength is still very important. A financially strong occupier with a good track record and a substantial business behind it is definitely preferable (all else being equal) to one where ability to meet the rent is less certain. Increasingly though, I wonder whether covenant strength on its own tells us enough.
The commercial property market seems to have become considerably more selective over recent years. We are seeing an increasingly clear distinction between assets that occupiers, investors and lenders actively want, and those that require considerably more ‘justification’ to buy.
The Bank of England has described a commercial property market characterised by ‘persistent quality-based divergence’, with prime assets comfortably outperforming secondary stock. Its March 2026 Agents’ report noted strong occupier demand and rising rents for prime, environmentally sustainable assets in central locations, while secondary assets were experiencing rising vacancy and falling rents. By July, it’s contacts were still reporting the strongest demand for Grade A city-centre office space against a generally subdued property market overall.
So, I believe this raises an interesting question for asset owners. If the market is becoming more selective about the property itself, should our assessment of investment risk become more selective too?
A good covenant cannot compensate for everything
Picture the scene, an office building leased to a very strong corporate tenant. On the face of it, the income might appear secure.
However, suppose the tenant has a break option in eighteen months? The building is in need of substantial capital expenditure. Its environmental performance is not great. The accommodation is becoming dated, and if the tenant leaves, there’s limited evidence of demand from comparable occupiers. The tenant might be excellent, but the asset may still have a problem. This is why I think It’s important to distinguish between tenant strength and asset resilience.
Covenant ‘strength’ tells us something about the occupier’s present ability to meet its lease obligations. It does NOT automatically tell us whether the tenant will still want the building in three years, whether the rent is sustainable, what happens when the lease ends, or whether somebody else will want the space afterwards. Nor does it tell us how much money may need to be spent to keep the property competitive. These are different questions, and in polarised market they become increasingly important to ask.
The market is rewarding quality, and exposing weakness
The distinction between prime and secondary property is particularly visible in the office sector. RICS reported in its Q1 2026 Commercial Property Monitor that expectations for prime office rental growth were positive, while projections for secondary office, industrial and retail assets were generally flat or modestly negative. RICS explicitly described this as ‘an ongoing bifurcation between prime and secondary stock’.
This trend is not new. Savills has previously highlighted the flight towards better-quality, more sustainable office accommodation, with occupiers becoming increasingly discerning about specification, flexibility and location. In some markets this has supported record rents for the best space, while weaker stock has faced a more difficult time.
Of course, this doesn’t mean every secondary building is uninvestable. Quite far from it actually. For an asset-management investor, the shortcomings may be exactly where opportunity lies. An obsolete or poorly managed asset (bought at the right price clearly) might offer substantial scope for refurbishment, reletting, repositioning or alternative use. However this investor is buying a very different proposition from one seeking stable, long-term income.
Different capital wants different kinds of risk.
The challenge for an owner is therefore not simply to demonstrate that the property has a tenant. It’s to understand which part of the market is likely to want the asset, and what evidence that buyer is likely to want to see.
Lenders appear to be looking at the wider asset story too
Around a year ago, I had an interesting conversation with someone very familiar with commercial property lending, who suggested that some banks were placing less visible emphasis on detailed tenant covenant analysis than I might have expected. I found this quite surprising, and I would be cautious about translating a single conversation into a general change in banking practice. Covenant analysis is likely to always remain relevant to property lending, and of course different lenders will approach risk very differently.
It did make me wonder though, whether the more interesting development is not that lenders care less about covenant, but that covenant is increasingly being considered as only a single component within a broader assessment of the asset. I believe the current market evidence suggests more selectivity.
RICS's credit-conditions indicator fell sharply to -44% in Q1 2026, from +9% in the previous quarter, although subsequent Bank of England intelligence suggested that credit remained available and that lending appetite was stronger for higher-quality borrowers and assets.
Also, CBRE's 2026 European Lender Intentions Survey illustrates how property characteristics have become part of lending decisions. Two-thirds of the lenders surveyed said they would not lend against assets failing their sustainability criteria unless there was an appropriate improvement plan. Only 20% said sustainability played no role in their lending decisions.
The above seems difficult to reconcile with an underwriting process concerned only with the strength of the tenant. The property clearly matters.
The important question may be how resilient the whole income-producing asset is
Imagine two properties. They produce identical rental income and have tenants of generally similar covenant strength.
· Property A is modern, energy efficient, well located and relatively easy to re-let. Its lease events are reasonably staggered and there is little major capital expenditure anticipated.
· Property B is older, has significant capex approaching, a break shortly before the owner's loan matures, and would require extensive refurbishment if the existing tenant vacated.
On a simple covenant analysis, the properties may initially look surprisingly similar. However from an investment and lending perspective, they clearly aren’t. So maybe we also need to ask:
How resilient is the whole income-producing asset?
The answer requires looking at the interaction between several factors rather than treating them separately. The tenant matters, and so does the lease but so does the building, its location, alternative occupier demand, future capital requirements and the timing of the financing.
It is the interaction between these factors that might determine whether an apparently secure investment actually remains secure.
Refinancing creates its own horizon
All the above becomes particularly important when debt is involved. A lease expiry in eight years’ time might not look urgent today. However if the loan matures in seven years, the lender considering the refinance may be assessing an asset with very little income certainty beyond the proposed new loan date. Of course, this could be disastrous.
So instead of looking only at WAULT, lease expiry or debt maturity independently, what happens when they are plotted together as financing horizon risk? We can look at what happens if several lease events, significant capital expenditure and refinancing requirements all converge within the fairly short period. A property can appear perfectly comfortable when each risk is viewed independently, but much less comfortable when their timing is looked at together.
The approaching cycle of commercial asset refinancing is already getting attention. RICS has previously highlighted the pressure created as debt originated during the low-interest-rate period resets at substantially higher costs, potentially requiring additional equity or asset disposals.
For owners, this reinforces an important principle; that risk should be considered against the financing horizon, not only the lease horizon.
Asset quality is becoming a financial issue
There is another consequence of the market's increasing selectivity. Building quality cannot be looked upon purely as an occupational or property-management issue any longer. If weaker environmental and energy performance reduces the pool of potential lenders, it definitely becomes a financing issue.
Likewise if outdated accommodation reduces demand for re-letting, it becomes an income issue.
If substantial capex is needed immediately before refinancing, it becomes a liquidity issue.
If a weak leasing market means a lender imposes more cautious assumptions to a future void, it can become a valuation and leverage issue.
So… the different disciplines begin to converge.
This is why commercial property asset management increasingly needs to bridge the gap between buildings, leasing and finance. Of course it’s not to turn every surveyor into a banker or vice-versa, but it’s important to understand that decisions made at property level can eventually appear somewhere else in the capital structure.
The best time to prepare for scrutiny is before somebody starts scrutinising
For owners anticipating a future sale or refinance, much of the work required to strengthen the investment case is simply ‘good, old fashioned’ asset management carried out well enough in advance. If a significant lease event is approaching, it’s absolutely vital to understand the tenant's intentions. If the building has obvious weaknesses, establish whether they should be addressed, priced into the deal or incorporated into an improvement plan. If substantial capex spend is likely, understand the timing and likely payback period.
If the income is heavily concentrated around one occupier or one period, it’s really important to understand what happens if circumstances change. Likewise if the asset is expected to be refinanced in a few years, think about what a lender will actually be looking at when that date arrives. It doesn’t mean attempting to turn every property into a flawless institutional investment, because some of the most attractive investment opportunities are very imperfect.
The point is though, to understand those imperfections (and be able to explain) before the buyer or lender finds them. Uncertainty is usually more expensive than a known problem with a viable solution.
A strong tenant is still valuable. It just isn't the whole investment case.
None of the above reduces the importance of covenant strength. A high-quality tenant will always be pivotal to a commercial property investment. That said though, I think owners should avoid allowing a strong covenant to obscure weaknesses elsewhere in the asset.
The market is clearly becoming more selective about investment quality. Lenders are showing greater sensitivity to aspects such as sustainability; while buyers continue to differentiate quite dramatically between assets offering reliable income and those needing significant intervention.
This makes the overall resilience of the asset increasingly important. It’s not just about the entity paying the rent anymore. It’s also about how sustainable the income is, what could happen when the lease changes, how competitive the building is, how much it’s likely to cost, whether the income can be replaced easily, and how does it all fit within the financing cycle?
A strong tenant doesn’t automatically make a strong asset, however understanding the relationship between the tenant, the property and the capital behind it can make an asset much easier to manage, finance and eventually sell.
Links to Sources
Bank of England. Agents’ Summary of Business Conditions, March 2026
Bank of England. Agents’ Summary of Business Conditions. July 2026
RICS. UK Commercial Property Monitor Q1 2026
CBRE. European Lender Intentions Survey 2026
Savills. Optimising Offices Autumn 2024
By Doug Parker, Montbart
First published 10th September 2026
