Fair market rent estimation for commercial property

3 Replies

Hello, everyone!

I am in the endgame of the closing process of a commercial property, and it's occurring to me that I have no idea what rents should look like for the spaces inside. The current tenants' rates are no help, given that one of them is the owner of the place, and the other is, for all intents and purposes, on a handshake agreement, so the amount is questionable.

Alas, this is't like in the residential world, where you can walk into a comparable building in the neighborhood, as if you were shopping around, and ask about rental rates in their office. Or is it? Are residential vs. commercial rates roughly similar, not counting the triple-net stuff?

I can't exactly ask to speak to a restaurant owner about their rent (or maybe that's how it's done? it doesn't seem right. I'd be annoyed if I owned a restaurant and someone came in to ask how much I pay for rent)

I tried contacting some agencies that help business find rental space, but that didn't lead anywhere (their proposed locations were all very far away from the actual neighborhood in question).

I'd love to hear any advice those more experienced may have on this matter.

Thanks very much!

Hi David,

There are a few common ways to obtain market rent data for commercial properties. 

-Costar or Loopnet (which is owned by Costar) are websites that have comp data available for commercial properties albeit at a monthly fee which may not make sense if this is a one off commercial deal or your first commercial deal

-Commercial real estate brokers - they have a good pulse on the market or at least knowledgeable ones do and they will have relationships with other brokers to share information about deals/leases that have just been completed, what TI allowances are common for the current market, etc. Some brokers or brokerages also release periodic/quarterly market research for different markets in the US (and internationally) with research on market rates, vacancies, construction, absorption, etc. (CBRE, Cushman Wakefield)

I would say that yes, commercial is very different from residential. Good luck on your endeavor. 

Josh

Pretty scary that you are almost at closing and asking these questions.

This is why it is key to have a knowledgeable commercial broker at the BEGINNING of the process. At least have a commercial attorney.

Go to Loopnet. Create a free searcher profile. Put in area for lease commercial properties. If you do not see ones for close by then call property management companies with nearest location. They might have insight.

You might want to negotiate and extension of your sales contract so you can get a handle on these things before closing. Once you close the seller is long gone from helping with the property or making concessions.

No legal advice given.