“What is the current market rent for my shop?”
One of the most common questions I am asked virtually every day is “what is the current market rent for my shop”? It sounds like a fairly straight forward question, however my response is the same on every occasion – “it depends”! I know it sounds like a fairly vague response to a specific question, however it really is accurate, current market rent is very site specific. But, what does “current market rent” actually mean?
Without citing chapter and verse of the legal definition, it broadly means the maximum rent the market is prepared to pay for a premises at a specific point in time, if those premises were vacant, having regard to it’s usage, but not taking into account who currently occupies the shop, the business’s goodwill, fit-out and other improvements.
This is of course very simplistic and not by any means a legal definition, however I think you get the picture.
Current market rent is most often determined during the course of a mid term market rent review or when a lease option is exercised. Effectively this means two parties to a lease being the lessor (landlord) and lessee (retailer) negotiate and try to agree on what they each believe to be the current market rent. If the two parties cannot agree on the new rent, the matter is then often referred to a third party, such as the Australian Institute of Valuers. They then appoint an independent, experienced and qualified valuer who becomes the arbiter and determines what they believe to be the current market rent.
When it comes down to assessing current market rent for a specific shop, there are a myriad of factors that have a bearing on the outcome. One of the most obvious is the state of the retail leasing market in which the shop is situated. Local economic issues such as unemployment, household income, age, population growth, competition and availability of supply, all play a part in determining what the current market will be for a specific shop.The physical state of both the premises and the complex in which it is located is also a relevant factor.
Within a small geographic area, there may very well be variations in current market rent. For example a newsagent located in a regional town on the high street may be paying $450 per square metre in rent, with most of the neighbouring retailers paying a similar level. However not too far away around the corner located in a shopping centre, another newsagent positioned next to a large supermarket is paying $750 per square metre, as are most of the specialty shops in that part of the shopping centre. So which Newsagent is paying current market rent? Well, both are because each shop has a very different value based on supply and demand. In other words if the first shop on the high street were to become vacant, the maximum rent attainable would only be around $450 per square metre, whereas the shopping centre newsagent has much more passing traffic and a cue of other retailers wanting space in that centre, meaning there is high demand for the space. The landlord would have no problem achieving $750 per square metre, hence it is reflective of current market for that location.
How do I determine what the current market is rent for my shop?
If you have a mid term market rent review coming up soon or perhaps an option to renew, you should start by doing your own research. If your shop is located on a busy high street or CBD, put your feelers out to determine what rents other retailers are paying. Talk to local commercial real estate agents, enquire about shops currently for lease and search the internet. Once you start trolling, you will be surprised how much market information is freely available.
If you are located in a shopping centre, this information is held a lot more tightly, however simply talking to your fellow retailers will often yield results.
Once you have collated this information, you will have a fairly good idea of what current market rent is for your shop and can then use this as the basis for your negotiations. Of course if you become embroiled in a major dispute with your landlord over a market rent review, you should observe the conditions of your lease and consider engaging a professional valuer.
I hope that this provides a little insight into this area.