How are market rental prices decided?
Curious how property owners, managers, brokers set prices and how often they adjust prices.
[{"id": "fsrns1a", "text": "Supply and demand?", "replies": [], "depth": 1}, {"id": "fsro8ov", "text": "Market rate is just that, market. It's based on comps but adjusted by the quality of the space, parking, amenities, etc. I offer 3-year or 5-year leases with 3-year or 5-year renewal terms. So my leases are three years with a three year option or five years with a five year option. I don't offer anything longer than that because market rate has been steadily climbing for a long time. My leases include 3.5% annual increases in the initial term. This seems high for my market but we have very low vacancy rates and very high quality space. We're definitely on the top end of the market. Renewal terms are set at lease signing. They also have 3.5% increases, or CPI whichever is higher. All rates are expressed in $/sq ft. I have very little loss factor and always do modified gross leases, no NNN.", "replies": [{"id": "fsutfm7", "text": "Thanks. 3.5% annual increase in initial term is high. Is that based on CPI as well? If not, how did you come up with that number? I realize you can command high prices because of low vacancy rates in your market.\n\nFor Renewal terms increases, \"the 3.5% or CPI whichever is higher\", is this CPI is a average of last x months or predicted CPI for renewal terms?\n\nI am trying to better understand how asset owners determine rental prices and lease terms and there seems to be quite a few factors to take into consideration.", "replies": [{"id": "fsuvrob", "text": "Initial term has no CPI language, just straight 3.5%. I will sometimes negotiate down to 3%. 2.5-3% seems standard in my market. \n\nRenewal CPI is calculated from the lease commencement. So if it's a three year initial term, we calculate CPI over that three years for our local market. We then compare that to the last year if the initial term + 3.5%. We go with whatever is higher. If they're close, I just give them the 3.5%.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fsrov17", "text": "If you ask your local subreddit they\u2019ll tell you all the \u201cdevelopers\u201d collude with eachother to set prices....lol.", "replies": [{"id": "fsuqiks", "text": "Price fixing?", "replies": [{"id": "fsvekq1", "text": "Yeah that\u2019s what stupid people seem to think. It\u2019s essentially a conspiracy theory.", "replies": [{"id": "ft1vjzh", "text": "Reddit is insufferable when it comes to landlords.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fsrw31q", "text": "At the most basic: The market decides. More demand/ more people want a unit? Price goes up. Less demand, price goes down until the unit is filled.", "replies": [], "depth": 1}, {"id": "fsrwmq9", "text": "Others like u/ottorange gave the correct answer, but I have the feeling you might be asking a more technical question. \n\nDo you mean, what is the process and set of tools used in pricing? Large rental properties tend to use revenue management software that claims to optimize rents based on broader market data, a more narrow comp set, lease expirations, demand, and desired occupancy. YMMV. \n\nDuring lease up, it's much more art than science, because most buildings do not have perfect comps that you can use to nail the correct pricing. You have to start out at aggressive rents, and fine-tune until you have a balance between leasing pace and the rents you're achieving.\n\nI hope that is helpful!", "replies": [{"id": "fsrwzq2", "text": "Yeah you make a good point about timing. If someone signs the first lease in the building when I'm just starting my renovation (we do mostly adaptive reuse gut renos) then they get a much better rate than the last guy in the door when we're almost done. Also small spaces pay a higher rate per foot than larger spaces. Tenant with agents pay more than tenants without. A lot goes into it.", "replies": [], "depth": 2}, {"id": "fsuvyhc", "text": "Yes. It's more of a technical question. \n\nWhat are some revenue management software for CRE space? For context, we're building a pricing software.", "replies": [{"id": "fsuwpei", "text": "They are all very expensive, enterprise solutions. YieldStar, Yardi, LRO, etc.\n\nHonestly, until you have a lot of assets under management it doesn't make sense to use these programs. And I don't even like them very much for large portfolios because they lead to lots of error if you set them on autopilot.\n\nIt's hard to beat a good human asset manager, or experienced property manager.", "replies": [{"id": "fsvpao1", "text": "I can see that. We're not looking to automate away pricing and lease terms, however, do believe that there are a lot of variables that go into optimal price calculations and coming up with favorable lease terms. Data Science can do a much better job at computation and guiding asset managers/property managers.", "replies": [{"id": "fv17j21", "text": "Look into yardi and yieldstar/RCA you're basically looking to compete with them if I am understanding what your after.\n\nAI in the RE space is a tough one. Leasing and credit (by credit I mean credit of tenants not lending) are the best places to start implementation", "replies": [{"id": "fv1atf8", "text": "Ah, interesting. Yieldstar is MF, primarily. We're going after different asset classes. \n\nWe looked have into measuring tenant credit worthiness a bit. It fits in with what we're developing.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fss2rhk", "text": "Rarely units find tenants unless it is lower. There are many rento guestimates. My criteria is if after 1 month ne can not rented, It is time for a deep discount.", "replies": [], "depth": 1}, {"id": "fssaesv", "text": "The invisible hand. /s/\n\nWhat I am seeing is that a lot is driven by replacement costs and risk. If it costs x to build the building with hard and soft costs plus financing costs and I expect a return of y then I need to charge z to cover the expected risk in order to achieve the desired return. If the market is out of balance say there is vary little space available such as the industrial market in SoCal, then an owner is able to charge effectively a premium due to the supply and demand imbalance. The space is a necessary good so groups will have to pay it in order to operate.", "replies": [{"id": "fsvq6o9", "text": "Interesting point. Are you referring to TI costs here? Landlords that are looking to cover the costs by charging a higher rent? \n\nWhat kind of risks?", "replies": [{"id": "fsvquxy", "text": "TI costs are part of the equation. There are also leasing costs such as holding periods, commissions, and legal. \n\nWhen you are talking risk, you are largely talking about the risk of a tenant default or non-payment.", "replies": [{"id": "fthii59", "text": "&gt;What I am seeing is that a lot is driven by replacement costs and risk. If it costs x to build the building with hard and soft costs plus financing costs and I expect a return of y then I need to charge z to cover the expected risk in order to achieve the desired return. If the market is out o\n\nOn average, how much are replacement costs?\n\nCommissions and legal costs are largely fixed, I assume?\n\nWhat is holding period in Commercial Real Estate Leasing context? Is it fairly common? I can see holding periods for sales.", "replies": [{"id": "fthk84z", "text": "https://www.nreionline.com/property-management/determining-fair-market-rental-value\n\nHere is a link that goes into more detail than what we can do here. \n\nThere is a lot that goes into it and with each product type there are different factors.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]