This article features insights from professionals at C. P. Braman & Co., CBRE, Integra Realty Resources, Cushman & Wakefield | CRESCO, and Newmark.
Real estate as an industry is one where informational asymmetries can have a significant impact on outcomes. Even where there is widespread access to digital information, the accuracy and reliability of information, whether relating to physical property due diligence, zoning or market data, can significantly skew expectations of parties to a real estate transaction. Looking beyond the data, having the expertise necessary to analyze the data, knowing what is there and what is not, and efficiently applying it to a transaction is critical to identifying both problems and opportunities.
Among the many data points to master in commercial real estate is market rent. Most real estate deals and legal documents are influenced by market rent in some fashion whether implicitly or explicitly. Many apartment dwellers are likely to be natural effective comparison shoppers, and emboldened by their apps and favorite AI, can likely quickly issue their opinions of market rent for their choice of apartment unit in a particular neighborhood. Many apartment landlords, aided by data fueled algorithms, AI, or their own old-fashioned market research are likely to have an informed opinion of market rent, too.
Rent is defined as “a fixed sum, or property amounting to a fixed sum, to be paid at stated times for the use of property… ; it does not include payments, uncertain both as to amount and time, made for the cost of improvements.” The Appraisal Institute’s Dictionary of Real Estate Appraisal (8th Edition) defines rent as the amount paid for the use of land, improvements or a capital good. Rent may or may not be a defined term in a lease, but certainly it is one of the most important economic provisions in a lease. Nonetheless, it is imperative to view rent within the context of the entire deal encapsulated within a lease.
What is market rent? The answer is more complicated than it appears on the surface. In traditional real estate analysis, an analyst uses a comparison grid to analyze the characteristics of properties in a market and the terms associated with leases for those properties to estimate market rent for a given property. In such analysis, it is not uncommon for an analyst to encounter a situation where numerous or significant adjustments must be made based on any number of property specific factors, some of which may not be obvious or easily confirmed. Having credible data and the desire and expertise to interpret it is critical to discerning markets and rents.
Market rent is different from contract rent, which is the amount of rent according to the terms specified in a real estate lease. It is not technically the same as feasibility rent, which is the generally the rent necessary to economically support new construction. It is also not face rent, which is contract rent before the recognition of concessions. Additionally, market rent is not, per se, the same as effective rent, which The Dictionary of Real Estate Appraisal states is “total base rent, or minimum rent stipulated in a lease, over the specified lease term minus the value of rent concessions provided at the landlord expense; the rent that is effectively paid by a tenant net of financial concessions provided by a landlord.”
Market rents are customarily evaluated by landlords, tenants, developers, underwriters, real estate brokers, appraisers, lenders, investors, lawyers and courts at various points throughout a property’s lifecycle. Definitions and qualifiers aside and all other things equal, if market rents do not support a sustainable return over the long term, the ability of owners to prudently invest in or maintain their properties is diminished. Market rents may be one of the key factors public-private partnership participants evaluate in evaluating the need and form of public participation in a project. In an environment of volatile operating costs, increased interest rates, and regulatory uncertainty, it is more important than ever to understand market rents – past, current and future.
Like many other words or phrases, the context in which the term market rent is used and who uses it can vary, which can change the term’s meaning.
Expert Usage of the Term “Market Rent”
For the purposes of this article, several experts were contacted regarding a series of questions based on which definition of market rent they used and related questions about how they analyze market rent in practice. These responses help to illustrate the usage of the term “market rent” in practice in the real estate industry. Each professional was asked to address the same two initial questions, then they were asked to pick another question and respond to it. The responses were only provided for the limited purposes of this article. The list of responding professionals is shown below:
- Emily L. Braman, MAI, SRA, AI-GRS | President & Chief Appraiser, C. P. Braman & Co., Inc.
- Keith Keltner, CCIM | Vice President | CBRE | Capital Markets, Multifamily IN + OH + KY
- Tim Jackson, MAI | Managing Director, Integra Realty Resources – Cleveland
- George J. Pofok, CCIM, SIOR | Principal | Cushman & Wakefield | CRESCO Real Estate
- Robert J. Vodinelic, MAI, MRICS | Executive Managing Director and Head of Strategy for Newmark’s Valuation & Advisory group and national practice leader for Valuation & Advisory’s Industrial & Logistics Specialty Practice
The Q&As for each responding professional follow.
Emily L. Braman, MAI, SRA, AI-GRS
What is your go to definition of market rent and why?
Market rent is the rent a property would most probably bring in an open, competitive market, between a typical landlord and tenant who are both informed and acting in their own interest, on lease terms typical for that property in its highest and best use.
I rely on this definition because it separates market rent from what a particular tenant happens to pay. Contract rent reflects one deal on one day, with whatever leverage, relationships or motivations existed at the time. Market rent is what the property would command now, from the market as a whole.
Because I work for both property owners and school districts, I apply the same definition either way, and “in its highest and best use” is a key part of it. For example, I don’t use a karate studio’s rent to value a retail pharmacy building, unless it’s an older building in a secondary location where that is realistically the tenant the market would bring.
Pick an asset type and explain the most overlooked aspect of determining market rent along with its impact?
For retail and office, the most overlooked aspect is the gap between stated rent and effective rent. A lease quoted at $20/SF may come with months of free rent, a large tenant improvement allowance and above-market leasing commissions. Once those concessions are spread over the lease term, the rent the landlord actually receives can be much lower. When stated rents from listings or broker reports are treated as market rent, income and value are overstated. This shows up in a couple of ways. Some office building mortgages require lease rates to stay above a stated level, so the workaround is months of free rent that lowers the effective rate while the stated rate stays intact. In regional shopping malls, stated rents are often kept high to avoid alienating existing tenants, while the landlord gives significant CAM concessions to attract new ones. On paper the rent roll looks stronger than the income the property actually produces.
Pick an asset type and explain how supply and demand is currently impacting market rents?
Class A office buildings and regional shopping malls are both good examples. Since COVID, as office leases have expired, many tenants have downsized or vacated. Malls face a similar imbalance: anchor closures and the shift to online shopping have left more space than there are tenants to fill it. In both cases, increased supply and decreased demand put downward pressure on rents.
Keith Keltner, CCIM
What is your go to definition of market rent and why?
In the multifamily industry, market rent is the rent a property owner or property manager believes they can get for a unit today. Think of it as the advertised rent before any specials or concessions are applied.
Pick an asset type and explain the most overlooked aspect of determining market rent along with its impact?
In multifamily, the most overlooked component in determining market rent is concessions. Market rent is advertised; effective rent is actual. Right now, 12.8% of multifamily properties in Cleveland are offering concessions, nearly all in new Class A lease-up. Market rent may be $2,100 and might even be what the landlord and tenant agree to, but if there are concessions that is not the true rent. If a landlord offered 2 months free over a 13-month lease, the market rent people see is $2,100 when the actual effective rent is $1,777. That $323 monthly gap is real money, and it disappears entirely if you’re only looking at asking rents.
How the concession is structured is as important as the amount. A landlord who offers that two-month concession upfront delivers the full value to the tenant on day one. A landlord who amortizes that same concession over the 13-month lease is effectively reducing the monthly payment, but the tenant never sees the lump sum. Same dollar value, but very different cash flow for both the landlord and the tenant. My advice to any property owner would be to front load the concessions as much as their cashflow allows them to so that when they go for a refinance or sale their trailing 12-month financials will show receiving the higher rent payments.
Pick an asset type and explain how another factor is currently impacting market rents more than before?
In multifamily, another factor impacting market rents is the cost-to-own gap, and in Greater Cleveland’s suburban markets it has never been wider. In suburbs like Avon, average single-family home values exceed $530,000. When you factor in a mortgage at this current interest rate environment, property taxes, and insurance, the monthly cost of ownership runs 50%-60% above the cost of renting a comparable unit. A household that could have comfortably purchased a home in 2019 is now making a rational economic decision to rent instead.
That shift has fundamentally changed who is living in suburban multifamily properties. These aren’t renters-by-necessity. They’re high-income professionals, often DINKs (Dual Income No Kids), waiting out the ownership math. Our State of the Market report shows vacancy in the Avon-Avon Lake-North Ridgeville corridor at 3.2% and Brecksville-Broadview Heights at 2%, with weighted median household incomes running $96,000-$135,000. That’s not a workforce housing story, rather a fundamental shift in the renter demographic. The newer construction apartments are demanding premium rents and the Class B and Class C properties’ ceilings just got raised, not lowered.
Tim Jackson, MAI
What is your go to definition of market rent and why?
We utilize the Appraisal Institute, The Dictionary of Real Estate Appraisal, 8th ed. (Chicago: Appraisal Institute, 2026), which is widely recognized as the pre-eminent industry source.
Market Rent
The most probable rent that a property should bring in a competitive and open market under all conditions requisite to a fair lease transaction, the lessee and lessor each acting prudently and knowledgeably, and assuming the rent is not affected by undue stimulus. Implicit in this definition is the execution of a lease as of a specified date under conditions whereby:
- Lessee and lessor are typically motivated;
- Both parties are well informed or well advised, and acting in what they consider their best interests;
- Payment is made in terms of cash or in terms of financial arrangements comparable thereto; and
- The rent reflects specified terms and conditions typically found in that market, such as permitted uses, use restrictions, expense obligations, duration, concessions, rental adjustments and revaluations, renewal and purchase options, frequency of payments (annual, monthly, etc.), and tenant improvements (TIs).
Pick an asset type and explain the most overlooked aspect of determining market rent along with its impact?
Office rents are significantly impacted by the level of tenant improvements provided by the landlord. This does not necessarily imply a direct 1:1 ratio of how much is spent in a given lease deal, as some expenditures are often necessary just to bring the space up to a normal vanilla box office to commensurate with the asset class. However, as the tenant’s specifications exceed that level the landlord often has to spend well beyond normal “paint and carpet” regardless of the condition of the space. This extraordinary cost has to be amortized over the life of the lease and is typically loaded into the rental rate. The impact of this premium should be deducted, ideally in terms of $/SF but sometimes as a %, in order to distil it to its core market rent component as if a typical competitive finish level.
Pick an asset type and explain how construction costs are currently impacting market rents more than before?
Industrial has been impacted by substantial cost increases, where demand for space to accommodate orders has been fairly inelastic even as costs rise significantly, resulting in increasing rent levels, especially for new functional space. Although this tends to also increase the spread between rents on new industrial spaces vs. older but still modern space, it nonetheless contributes to rising rents throughout the asset class. An interesting consequence has been that with rising rents, prevailing industrial values have exhibited continued increases despite upward pressure on cap rates due to the upward shift in interest rates.
George J. Pofok, CCIM, SIOR
What is your go to definition of market rent and why?
Market rent is what deals actually close at, net of concessions. For Cleveland industrial, that means looking at recently signed deals for comparable size, product type, and submarket, quoted on a consistent NNN or gross basis, rather than asking rates or older in-place rents.
Pick an asset type and explain the most overlooked aspect of determining market rent along with its impact?
With small-bay flex, the most overlooked factor in setting market rent is suite size. A 2,500 SF suite and a 15,000 SF suite in the same building can lease at very different rates per foot. The smaller units have a larger tenant pool and the least competing supply, so they consistently command a premium, while larger suites face more competition and lease at lower rates. Relying on a building-wide average rent underprices the small suites and overprices the large ones, which costs income on the small units and extends downtime on the large ones.
Pick an asset type and explain how construction costs are currently impacting market rents more than before?
Small-bay flex has been one of the strongest performers in Cleveland industrial, with occupancy consistently above 90%, and construction costs are a big reason why. New small-bay product costs more to build per square foot than larger buildings, with more demising walls, more doors, more restrooms and more utility runs, and the rents needed to make a new development pencil are well above what most small users have historically paid. As a result, very little new small-bay space is being built, which keeps supply tight while demand stays steady. That lack of new construction has given landlords of existing buildings the leverage to push rents significantly, because tenants have few alternatives and replacement cost has effectively set a higher ceiling for the market.
Robert J. Vodinelic, MAI, MRICS
What is your go to definition of market rent and why?
The definition we always use is: The most probable rent that a property should bring in a competitive and open market reflecting the conditions and restrictions of a specified lease agreement, including the rental adjustment and revaluation, permitted uses, use restrictions, expense obligations, term, concessions, renewal and purchase options, and tenant improvements (TIs).
Pick an asset type and explain the most overlooked aspect of determining market rent along with its impact?
I work predominantly with industrial assets. Typically, what I see as being overlooked to some extent are expense obligations. Many times, appraisers will just assume an asset is “triple net” in reimbursements but gloss over any limitations that may exist in the reimbursable expense categories, or even the magnitude of differences in expenses which can make one asset have a considerably higher occupancy cost than another (for example with property taxes).
Pick an asset type and explain how supply and demand is currently impacting market rents?
With industrial and specifically the logistics segment of industrial, there is a significant flight to quality happening within leasing. Assets that have been built in the past several years are seeing sharp rent escalations while those assets built 20-30 years ago are seeing more middling growth (if any). This is leading to a growing divergence in market rent between the asset classes. Occupiers are looking beyond the typical characteristics such as clear height, percentage of office, etc. and are now focusing much more on the facility having ample power for higher levels of electrification and connectivity, and also larger site sizes to allow for more vehicle parking, whether employee or truck parking.
Conclusion
Navigating real estate dynamics in current times demands as much skill and experience as ever. For various reasons, market rent is one of the significant items to be aware of that can ripple through many aspects of a real estate transaction throughout a property’s life cycle. Market rent can be one of many factors influencing a lease, development, purchase, sale, loan, investment or partnership. Staying attuned with market rent dynamics is essential to successful strategies in today’s real estate deals.
Contact
Questions about how market rent affects a lease, loan, or acquisition? Contact KJK Real Estate attorneys Rich Morehouse (RAM@kjk.com) or Steve Marrer (SAM@kjk.com).