June 2019 — Data that are available from a variety of sources, including your colleagues in the leasing field, can provide information on the pricing of competing buildings and market conditions that affect your rent.
Getting to know your colleagues can have benefits beyond learning the going rental rates. In spite of what you may think, in most cases your competition will be friendly. A fraternity/sorority of sorts results from sharing the same frustrations, the same gains and losses, the same pressures and rewards that you go through on a daily basis. People you have treated fairly will be more likely to pass on and trade information than people who feel that you have taken advantage of them.
Getting to know the managers, vendors, and leasing agents of other buildings and brokerage firms will help you plug into the information circuit. Some of the information you learn over a lunch, a cocktail at the end of the day, or a round of golf on the weekend could help your career. You might learn, for instance:
- The real reason that your competition made a deal that you lost.
- The possibility of a deal (which your competition could not salvage) with a tenant who plans to vacate your competitor’s building.
- The concessions that your competition is actually making and not what is put out for public consumption.
- Conditions in the building.
Creating a Rent Grid
The rent grid should list as much of the financial data about the competing buildings that you can secure. A rent grid is a basic analysis tool that compares your building to similar competing buildings in your micro-market. Collecting data for a micro-market rent analysis is usually something you have to do yourself. Often, one of the big commercial real estate firms or the local Building Owners and Managers Association (BOMA) chapter will collect comparative data for the macro-market. Macromarket analysis may even be broken down into averages of central business district (CBD) and suburban rents. While this information may give you a gauge of the big picture on rents, it does not relieve you, however, of doing the nitty gritty research in your own micro-market.
Creating a rent grid is a three-step approach.
- Identify competing buildings.
- Contact the company who is leasing them.
- Compare the building features and its amenities to yours.
By now you should have visited all the competing buildings in your micro-market or have gone to their website for a virtual tour. While you were in each building, you should have gotten the name of the manager or leasing agent, which is usually posted on or near the building directory. Now it is time to call that person, introduce yourself, and state the purpose of your call.
Do not attempt to deceive anyone by saying that you are a prospective tenant, or that you are a broker who is representing a prospective tenant. That is not the way to gain cooperation in the marketplace. It would probably backfire, and you would end up embarrassing yourself. You should be straightforward and honest about your survey. You might even offer to share the information that you get with everyone because the information you are currently requesting will have to be reevaluated repeatedly during the time it takes to lease up a building.
Record the information you have gathered about the features and amenities of competing buildings in a chart.
Don’t expect the leasing agents to tell you everything, and don’t accept any number at face value. One or all the elements that the manager or leasing agent will not share with you may have negotiating room.
Along with showing the building address, class, number of floors, square footage, and year built, the rent grid should include the following items:
- Base rent charge: a set monthly amount
- Operating expense charges: considered “additional rent” and can vary depending on how efficiently the building was operated
- Parking charges
- Tenant improvement allowance amounts: the money that an owner allocates for remodeling the space to suit the tenant
- Other leasing concessions or adjustments: may include free rent for several months
- Leasing commissions: the amount an owner will pay to a broker to get the space leased
- Types of adjustments
- Length of lease
When you have completed the grid, you will be able to compare the marketability of all the properties you have surveyed, including your own. You need to share this information with the owner, especially if the rents being sought are out of line with the market.
Absorption and Vacancy Rates
Fundamental to the discussion of rent and how much you can charge are absorption and vacancy—the basic indicators of the supply and demand of space.
Absorption refers to the market’s ability to fill up leasable space created by new construction or vacancies in existing buildings. The rate is the speed at which absorption takes place. It is expressed in square footage per year.
Knowing the absorption rate is fundamental to performing a market analysis because it is an indicator of supply and demand, which impacts the amount of rent you might ask for your building if you want to get the most amount of space leased in the shortest possible time.
Related, yet counter to the absorption rate, is the vacancy rate. The vacancy rate tells how much space is not leased in the existing inventory of space. It is expressed as a percentage of all available space in a defined area, usually a macro-market.
The annual absorption rate, especially when compared to the rate over several years, can reveal important trends. Markets overburdened with speculative overbuilding may result in too much vacant space. This tends to lower rents as owners scramble to make deals to attract tenants. If an economic downturn occurs at the same time, owners may become desperate to fill their buildings to avoid foreclosure.
Here is an example of the way a double whammy of overbuilding and a downturn could affect your leasing program. Suppose the economy sours, and your market experiences big layoffs and plant closings. Meanwhile, 2 million square feet of speculative space is due to become available in six to nine months, along with an unknown amount of existing space because of expiring leases. The market most likely will not be able to absorb all that space, and the absorption rate will decrease. So, by the time the third quarter rolls around, and three major tenants have their leases come up for renewal, you may have to re-price the space to be competitive with all that vacant space out there that is not being absorbed.
Another absorption factor that you must consider is the amount of planned space not currently constructed but due to come online during your leasing campaign. This type of space is usually classified as “buildings announced” as owners try to drum up potential tenants to pre-lease a building and qualify it for mortgage financing.
This article is adapted from BOMI International’s Leasing and Marketing for Property Managers course, part of the RPA designation program. More information regarding this course or BOMI International’s new High-Performance Sustainable Buildings credential (BOMI-HP™) is available by calling 1-800-235-2664. Visit BOMI International’s website, www.bomi.org.