Commercial Property – Traps in Rent Review Analysis and What to Look For

In commercial and retail property leasing, rent reviews form a critical part of the property profile and performance. The leasing manager or property manager for the property should be completely aware of the rent review activity across the property and in the local area. In this way they can achieve affective rental growth and ultimately increased property values for the landlord.

Here are some tips relating to rent review process and analysis:

Understand the supply of vacant space in the local area that could impact future leases and levels of rental. This will be ongoing fact of analysis and trending. An abundance of vacant space will soften levels of rental and ultimately the rent review process. The best way to do this is to identify the comparable properties in the general location and then track their tenancy leases and vacancies.

Any new property developments in the local area will have impact on other established properties. For this reason it pays to monitor the new development approval processes through the local council or municipal authority.

The demand for lettable space will have impact on existing rentals. When the business community is actively looking for new properties then rentals remain high. If on the other hand the economy is frustrated or declining, leasing enquiry will decrease and rentals will do the same. On this basis you need to track the levels of rental and space enquiry for the different property types in your area.

When a new rental is established in the local area it will sometimes be influenced or enhanced by a lease incentive. This incentive factor should always be tracked as it will have impact on the entire leasing process. Generally speaking, sitting tenants in a rent review process will not see an incentive as part of their midterm rent review calculation but it may have impact on a market rental dispute or determination (refer to the lease in all cases to know what the case is to be). That being said, an incentive consideration is quite likely to be active when it comes to the time of lease renewal with the same sitting tenant; that tenant will be looking around the market and may be influenced to move to another property by an incentive. Know what the local lease incentives are for each property type in the current market.

Other rentals achieved in other properties should always be monitored. This is where a cooperation and information sharing arrangement between landlords and property managers in the local area is a productive process.

Other market rentals or other rentals achieved in other properties may not be true market rentals. On that basis you need to question the mechanism and decision process behind the ultimate rental decision. Things that will change the rental decision will be fixed percentage increases, fixed rent reviews, the timing of the other rent review, terms and conditions of each lease, incentives, cap and collar restrictions on rental levels, the location of the different properties, improvements in each property, and the services and amenities that are attributable to each property.

The analysis of rental and the rent review process is quite specialised. As you can see from the above checklist, an established rent is not directly comparable to any other property until it has been dissected and analysed by the appropriate person. Adjustments of levels of rental will always occur based on the individual attributes of each tenancy.