13 Jan Which Rent Comparable Data is Best – Just Leased, Pending/Most Likely or Asking for Lease for the Income Approach?
In a LinkedIn group discussion, Avison Young broker and investment advisor Tony Kim shared illuminating insights into building the most accurate market lease analysis, whether for an appraisal or for client advisory. His main points follow.
Asking rents versus completed leases
For general appraisals in Los Angeles and other Southern California counties, there is still quite a spread between asking rents and completed, just leased rent comparables. The difference is typically 20%, and the asking rent is typically the maximum ceiling. In the Orange County submarket, also watch for substantially lower base rent teaser rates during the first year of the lease only. Consider those rates together with concessions and the overall net effective rent.
How many comparables, and which kind
Client requirements vary for a solid rent study and analysis in the Income Approach. However, 6 total lease comparables with a mix are ideal: 4 to 5 completed, 1 asking and 1 to 2 pending or most likely. Nationwide lenders would like to see a minimum of 4 signed leases.
Kim ranks pending or most likely leases first. These are generally the best indicator, because a lease that is out for signature very accurately reflects real time market activity and the most current negotiations.
Just leased actual rent comparables come second. With these, look at three things: base rent, CAMs and total rent paid. You can’t just pick a rent based on base rent, because property taxes are the main component of the NNN charges. Depending on the purchase date, NNNs can range very widely, even for properties right across the street from each other. Therefore, look closely at overall rent.
Marketing time and older leases
Also look at the marketing period, meaning the number of months on the market. It is similar to the marketing time in the sales comparison approach, which an appraiser needs when providing a concluded value. If the leased rents are more than 18 months old, they call for a judgement call.
Why completed leases matter
Completed rents are critical because of actual concessions: free rent, annual increases and TIs. Asking for lease comparables cannot provide those. The more confirmed leased data, the better the support and the easier the analysis, reasoning and conclusion.
To solidify the concluded rent for the subject property, also include 3 to 4 expert opinion surveys of the subject’s market rent. These should come from leasing brokers in the immediate submarket, with actual discussions, confirmations and verifications, just as with any rent data used.
Takings and eminent domain
Finally, in takings, arbitration and eminent domain, the market rent definition is different: the highest most probable rent. In those cases it is mandatory to use completed rent comparables only, which makes sense from a governmental agency standpoint.