Paul blog

Market rental valuation – do I need one? And what am I missing?

22 April 2019, by Paul Mautz

Thinking of moving premises? Are you about to sign a new lease? Perhaps you’ve obtained a market rental valuation and what you’re being offered appears to marry up – on paper?

Stop, pause and read on.  You could be missing an opportunity to not only save money, but to make a greater impact on your organisation.  There are a number of key variables market rental valuations don’t take into consideration which can have a significant impact on your transaction.

TwentyTwo's Paul Mautz shares his insights on what you need to consider.

 

‘Asking’ rental – What is it?

The agency or landlord advertising the space would have indicated an ‘asking’ rental, equating to what they ideally want to achieve. The asking or face rent does not factor in incentives such as rental-free periods or financial contributions and is not the best measure to compare different space options. It’s also typically an increase over recent deals struck in the building, in an effort to eventually try and lift rents across the entire property. It’s up to you (the tenant) to determine if the rental is fair and what equivalency it has in the market place.

So how do you best gather this insight?

 

Market rental valuations – what they do deliver

Tenant’s often obtain a market rental valuation. The most common method used by valuers to assess the fair rental for office space is the ‘comparative’ approach. This is where the rent offered is compared to rents for other similar leasings. Further adjustments are made for premises size, quality, location, views, height, amenity, timing, incentives, tenure, lease terms and a range of other variables, to arrive at an assessed ‘market’ rental for the premises. Tenants can then use the valuation to ascertain what the broader market may be prepared to pay to lease their premises.  

 

The key variables - what they don’t deliver

However, there are several more variables to consider when deciding what the space is worth than those factored into the rent assessment. You also need to decide how much benefit and improved efficiency your business can gain from leasing the premises and how affordable the rent is when it comes to your bottom line. It’s also challenging to identify the optimal amount of space required and then finding it, so often premises turn out to be too large for requirements, which affects the overall cost. The cost of any fit-out needs to be factored in along with the impact on the overall economics of the decision to stay put or move. 

Other questions that arise along the way are; Is what’s being leased a unique offering in the market? What negotiating leverage do I have? Do co-tenants offer synergies? Are the premises close to where staff live? Is the location convenient to customers and stakeholders (if they regularly visit)? Do we still have high book values for our existing fit-out and other capital investments that would need to be “written off” at a cost? Does the cost of relocating outweigh staying put?

Unfortunately, these factors tend to not get reflected in the rent offer, nor the rent valuation.    

A further issue with rent valuations is the rental evidence used may be many months, sometimes years, old and the accuracy of some data used is questionable, particularly in a rapidly moving market. By looking at what deals have been done in the past assumes these are reflective of what the space is worth now or in the future, and that all tenants have similar issues to address in making their decisions.

Obtaining a rental valuation can be a useful guide, but beware, they tend to be backward looking and too generic to make an informed go/no-go decision on.

 

Negotiating a deal - the Multiplier Effect

Negotiating for new commercial space is a complex opportunity. It’s important to think bigger than simply the cost per square metre and look at your own specific circumstance (as I’ve already explained). By simply fine turning several elements of a deal (area, rental, lease term, furniture and fit-out, lease end/exit obligations) can result in significant savings and reduced risk for an organisation.

TwentyTwo’s Managing Director, Dean Croucher recently summed up perfectly in a one-page infographic - we call it the Multiplier Effect. 

 Multiplier Effect .001

 

My Advice

Before deciding to obtain a rental valuation consider the following questions:

  1. Do I fully understand my business and premises requirements?
  2. Have I considered all the options in the market – staying or relocating – and if relocating – am I certain I have considered all options?
  3. How will I make an objective and informed decision (what evaluation criteria will I use?)
  4. What is the full range of advice I might need to support me through this process?

Once considering these questions, then decide if you need a rental valuation, however, recognise that a valuation is just a guide and the rents that make up the wider data are a reflection of each tenant’s differing issues, pressures, financial circumstances, negotiating leverage and timeframes.

Ultimately the final rental comes down to a negotiation between the parties. You will need to consider who is best placed to support you with the negotiation process and develop a “negotiation strategy” to maximise your leverage.

If you would like to better understand the steps involved in developing a negotiation strategy contact me and I’ll talk you through the process.

 

 

...

About the author

Knows a lot about 1970’s music. Wears a hat. In-house quiz master. Sauv Blanc and MU fan. Prefers to spend winters in Europe. Learning the guitar.

Paul has been a senior member of our team since 2004 and specialises in premises procurement and leasing. With 25+ years' experience in the commercial property sector, he's been involved with a number of large leasing transactions, representing clients in project leadership and tenant representation roles.

Other posts by this author...

10 September 2023

Navigating seismic standards: simplifying workplace safety

A better understanding by tenants of the seismic performance of commercial buildings continues to gain momentum.

Read more...

21 November 2022

Wanted! An earthquake rating tool that covers all angles

“The NBS shouldn’t be the sole way for business owners and tenants to assess the risk to their people and business when signing up to a building” says TwentyTwo’s Paul Mautz.

Read more...

10 August 2022

Gaining a better understanding of seismic risk

MBIE recently issued guidance for building owners and occupiers on how to assess continued occupancy of a building with a low seismic rating – useful from a number of perspectives…First, it provides a sound framework...

Read more...

27 June 2022

The Wellington office market is short of good options. Our advice…

If you’ve started a search for good-quality space over 1000m2 in Wellington, you would have got a shock at how few good options are available.So why is this?There are a number of reasons.

Read more...

21 April 2021

Operating expenses… do you know what’s what?

If you’re leasing property, then somewhere within your rent payment will be a contribution to the building’s operating expenses or ‘opex’.

Read more...

21 September 2020

Precast concrete seismic risks: A tenant’s guide to leasing buildings with precast flooring

If you’ve been keeping up with the news on earthquakes and their effect on buildings, you would have come across much discussion on the performance of precast flooring systems.

Read more...

28 May 2020

Fix or float my rent?

While many organisations have a lot on their plates right now, sooner or later they’ll need to think about whether to relocate or stay in their existing premises when their lease expires.

Read more...

09 November 2019

Adding Value, Tackling Challenges - NZDF, Youth Development Facility

“When TwentyTwo was approached in February 2018 to assist the NZ Defence Force with developing a new facility for their Youth Development Unit (YDU) for the Wellington region in Trentham, Upper Hutt, we jumped at...

Read more...

30 April 2018

IFRS 16: The leases standard is changing - are you ready?

If you’re responsible for your company’s accounts or managing its property portfolio, you should be aware of the upcoming changes to the treatment of lease rent liabilities in the financial statements.

Read more...

06 February 2018

Does your workplace contain asbestos? Legislation changes coming into effect April 2018

The risks around asbestos being present in buildings has been a significant issue for many years.According to Worksafe, it’s a leading workplace hazard with more than 170 people dying each year from past asbestos exposure.

Read more...

03 July 2016

Incentives or inducements – weighing up the costs

I’ve recently been involved with a job that raises the question of just what constitutes an incentive or inducement in a leasing deal.

Read more...

03 February 2016

Ten into one. A colocation journey

In 2013, 10 health regulatory authorities started a journey to collocate and create a model of one organisation providing the corporate services for all 10.

Read more...

30 June 2015

The role of the tenant adviser in New Zealand

Over the last 20 years, an increasing number of New Zealand property professionals have focused their attention on providing advice specifically tailored to tenant and owner-occupiers of commercial property.

Read more...

04 June 2015

RICS Commercial Property Leasing sessions – by TwentyTwo's Paul Mautz

TwentyTwo's Associate Partner Paul Mautz MRICS FPINZ will be presenting the RICS Oceania three-hour training session covering Commercial Property Leasing.

Read more...

04 June 2015

TwentyTwo advises government in Christchurch development

TwentyTwo’s Paul Mautz acted as lead adviser for the Crown’s lease of space in the recently announced $150+ million, river-front office and apartment complex in Christchurch CBD.

Read more...