A Perfect Market Rent for Commercial Real Estate Leasing Agents
A market rent is not just any old rent; it has been established in today’s property market and reflects an agreement between the parties that indicates true market conditions.
Rents can be compared by property type and location. Special and unique properties will raise challenges because you will have little to compare to. Market intelligence is critical if you are to negotiate on any rentals.
In simple terms, landlords want the highest rent, and tenants want the lowest rent. An agreement is likely if the parties compromise on the current property market conditions. Research the current market supply and demand factors before negotiating leasing space.
Market Rents Challenge
In a property with multiple tenants, one market rent can impact other tenants, who will soon have a similar market rent review. So, there is an argument to be made that setting a market rental is a special process; the wrong rental can pull back the property’s value. That is why property valuers are sometimes brought in to arbitrate the rental agreement. But be warned of the balance of the cost of the process versus the reasons for doing it.
In these times of slower business and restrictive finance, it is still better for landlords and tenants to reach a workable market rent themselves that allows occupancy to continue and vacancies to be avoided.
Tenant facts and costs
Most tenants will prefer to remain in occupancy rather than spend unnecessary money on relocation to another building; however, some extra things may ‘tip the scales’ and frustrate negotiations on rentals and leases.
The most common problem is landlords who do not physically maintain a property in ‘top condition’ yet expect tenants to remain in occupancy and pay solid and aggressive rents. This attitude will drive tenants away from the property at option time; we see the problem frequently. Who loses? The landlord does. Tenants always have choices.
Good commercial and retail leasing experts know how to condition the parties to the market and the leasing possibilities. Local market evidence will help you close a leasing transaction in most circumstances.
Gathering Market Rental Facts and Figures
If you are going into battle on a rental review to market, make sure that you have all your facts and that those facts have been correctly gathered and validated to the property type. Here are some ideas for that:
- A market rent is precisely that. It has not been struck by other review processes such as fixed %, fixed amount, or CPI index. Ask questions about the comparable rental and know how it was struck. You can only compare ‘market’ to ‘market’.
- Inspect the properties on which you have the rental details. They will likely need to be assessed for comparable improvements, services, and amenities. Some location factors and property ages will also need to be compared.
- Every ‘comparable’ tenancy should be viewed to ensure that it is truly similar in location, use, configuration, and improvements.
- Ask questions about any incentives that may have been provided to a tenant in setting a ‘market rental’, as this will require adjusting the provided rental from a ‘face rent’ to an ‘effective rent’. Only then can it be compared property to property.
- The dates of reviews will be relevant to the final figures. A rent established last year may be irrelevant this year. Get this information from the property managers or landlords of the ‘comparable properties’.
To Arbitrate a rent review or not?
Finally, any market rental matter going to arbitration will usually incur a fee for the experts to get involved. It is interesting to note that many rental arbitrations result in ‘compromise or middle ground’ decisions. The only person that makes money is the ‘arbitrator’.
It could be that the landlord loses more in fees for the arbitrator than they gain in extra rent. It should be noted that most arbitrated rents are final and fixed; if you submit a rental to the ‘arbitrator,’ ensure all your information is entirely relevant and correct.
Common sense is perhaps the best process to implement in any market review. As a leasing manager or property manager, you can be the person who brings the parties together in an agreement.
