Market Rents

What is Market Rent today?

By definition it is the amount of rent one party is prepared to pay for premises at arms length, with incentives amortised from the total figure to give a net total. In other words if a corner site in an excellent location in a shopping centre is adjudicated by an interested party based on what they think there business can afford to pay is $150,000 per anum that is not the market rent. If there is a fitout contribution and rent free period totaling $60,000 (very achievable), the actual market rent based on a 5 year lease is $131,000. $20,000 less in year 1 is a lot of money. Most businesses need to find $100K plus in sales to net the extra $20,000 and lets not forget over a 5 year lease this amount is actually $125,000 plus.

The problem with the Shopping Centre Industry is everything is based on this false market as funds for fitout and rent free and juggled from different budgets therefore the net 'market' rent the centres log and in some states register is fundamentally flawed. There is a company LIS which we had an alliance with and parted with due to this difference of opinion. Anyone can search a registered Lease in NSW, QLD and ACT however what does the figure really mean? LIS have done a great job in collating a database that basically mirrors the false market created. These days 'market rent' is further distorted in shopping centres by the fact that many tenancies require additional storage space or licensed areas for seating. The amounts extracted from some Centres for a storage cage that is wire mesh and in a loading dock corridor are phenomenal; we have seen as much as $6,000 per anum for 10 sqm! Suffice to say the industry is brilliant at generating cash and this component is an increasing segment which we refuse to pay when we negotiate on behalf of our clients.

Market Rent should be replaced with 'perceived ability' to pay in the Shopping centre model. We all know most categories are bench marked to Jebb Holland Demasi adjudicated occupancy cost criteria and this exercise is self serving.  Sales figures are used everyday to adjudicate the perceived ability to pay. This is not market. If a site has a tenant generating $1.5 million in sales the centre will automatically value this 'rent' at $225,000 Base per anum and seek this at renewal or refer to the sales to a competitor to maintain and grow it one way or another. This is a false market.

The correct assessment should use the average specialty MAT Sales for the centre and measure the sites true ability this way, in the way that our 'Estimator' does using a special algorithm. We recently were involved in a 'market review' at Parkmore Shopping Centre whereby the Terry White Chemist that was paying a healthy $302,000 per anum Base, was asked to pay $480,000 simply because of the sales figures reported and perceived ability to pay. The independent valuation adjudicated a rent of $380,000 per anum Base, which shows the centre's valuation is vastly incorrect.

Sales figures and sales figures alone are the only ingredient centres use to determine a value for each site. The rate per square metre for rent is invalid as we move into the, “super”, revenue generating micro sites, such as kiosks and food court tenancies that can command up to $200,000 for 20-40 sqm or $4,000 to $6,000 per square metre per annum.

It is heartening to see that true 'market rent' as defined does work in the true free market. We were involved in a market review for a large and very successful cafe in the up and coming High Street Northcote strip recently. The Cafe is large at 400 sqm and was paying a soft rent of $74,000 per annum, the Lessor requested $250,000 at Market Review. The valuation came in at $83,000. Why? Because the premises over the road paid similar rent recently and the cost of the fit out and improved value was also considered. If this lease was in a centre with the tenant reporting his sales everything would have been different.

To discuss true market rent, use the 'Estimator' and call Leasewise for a better and more detailed understanding on comparative rents and the current market.

LW