How can you determine the rental rates for commercial spaces?

1 Market Conditions

The first factor to consider is the supply and demand of commercial spaces in your area. You can research the vacancy rates, the absorption rates, and the average asking rents for similar properties in your location and submarket. These indicators will help you understand how competitive the market is and how much leverage you have in setting or negotiating the rent. Generally, the lower the vacancy rate and the higher the absorption rate, the more favorable the market is for landlords, and vice versa. The average asking rent will give you a benchmark for comparison, but keep in mind that it may not reflect the actual rent paid by tenants after concessions and incentives.

2 Property Features

The second factor to consider is the physical and functional characteristics of the property. You can evaluate the size, layout, condition, amenities, and accessibility of the space and compare them to other properties in the market. These features will affect the appeal and suitability of the space for different types of tenants and businesses. Generally, the larger, newer, better maintained, and more equipped the space is, the higher the rent per square foot. However, you also need to consider the specific needs and preferences of your target market and how they value different features.

3 Lease Terms

The third factor to consider is the contractual and financial aspects of the lease. You can review the lease term, the rent escalation, the security deposit, the tenant improvement allowance, the operating expenses, and the rent abatement clauses and compare them to other leases in the market. These terms will affect the cash flow and risk of both parties and influence their willingness to pay or accept a certain rent. Generally, the longer the lease term, the higher the rent escalation, the lower the security deposit, the higher the tenant improvement allowance, the lower the operating expenses, and the shorter the rent abatement, the more favorable the lease is for tenants, and vice versa.

4 Rent Estimation

The final step is to use the above factors to estimate the rent per square foot for your commercial space. You can use different methods and tools to do this, such as market surveys, online calculators, or professional appraisals. However, a simple and common way is to use the net effective rent formula, which calculates the rent per square foot after deducting the present value of any concessions or incentives from the nominal rent. The formula is:

Net Effective Rent = (Nominal Rent x Lease Term - Present Value of Concessions) / (Lease Term x Square Footage)

By using this formula, you can compare different lease scenarios and adjust the nominal rent or the concessions to reach a net effective rent that is competitive and reasonable for both parties.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?