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Why Buildings Have Different Rates

Why Buildings Have Such Different Rates

I was showing a client several buildings in Troy.  The client knew one of the tenants in a perspective building.  The two of them talked and the tenant told my client what they were paying for rent. From that point on the client used this number as the benchmark. The rental rate was less than the rest of the buildings in the market. However, the only information that was shared was the rent/s.f. If costs per square foot of rent was the only cost factor that would have been a fair comparison. However, there are many other items the client didn’t take into consideration:

Factors That Cause Different Rates:

The Location

  • Is the building located on a major road with lots of traffic? 
  • Can the occupants easily enter and exit the building? 

The Building

  • Is the building primarily vacant? 
  • Are both office buildings a class A building? 
  • Has the space undergone improvements? 
  • What amenities do the buildings have?   
  • Has the building been upgraded recently? 
  • When did the landlord buy the building? 
  • What are the landlords operating costs? If they are higher in one building than another, the cost will be higher.
  • What security systems are in place to benefit the tenants? Are there security guards at night on weekends? If not, you will have to let them in the building after hours. 
  • Did the current owner buy a vacant building out of bankruptcy? If this is the case, the first few tenants in the building will get a better deal. 
  • Is the landlord local? Does their staff do a good or poor job of management? 

The Space

  • How big is the leased premises? A larger tenant will get a better deal than a smaller one. 
  • The view can be very important. Landlords in high rises often charge more the higher you are in the building. In the building I lease the view towards Detroit costs more than the residential view.
  • Is the buildings rentable usable factor 10% or 20%? The higher the number the higher the overall costs will be. Unfortunately, unless your agent provided you a financial summary on the expected cost you won’t see theses until you have been in the building for over a year. 
  • Was the space in move in condition or did the landlord pay for a full buildout? If a tenant takes the space as is then the landlord is willing to provide free rent and a reduced rental rate. Or the landlord may only provide $10.00 worth of build out credit while the rest of the community is getting $25.00/s.f.

The Terms

  • A 3-year lease verses 7 or 10 years will cost less in rent. 
  • When the lease was signed was the economy rocking and rolling or in a recession? 

Utilities

  • In the Detroit market if your electric is separately metered you will typically pay .75/s/f.  In the city of Detroit many of the buildings charge $1.90/s.f. 
  • Is the landlord paying for cleaning 5 days a week?  Or do you have to take out the garbage and vacuum yourself? 

If a tenant was the first tenant in a building, they have taken the risk that the building will someday be full and will probably see different rates. When I’m told another tenant received a rent offer for $1.00 less than they offered my client I can’t possibly know if it is really a good deal.  The only way to know the reason behind the different rates is to review their lease to see if we are comparing apples and lemons or oranges and tangerines.

/ Commercial Real Estate