Inside Market Leasing Assumptions: Key Factors That Drive Decisions
Inside Market Leasing Assumptions: Key Factors That Drive Decisions
What exactly are Market Leasing Assumptions (MLAs)? MLAs are essentially educated projections about future leasing activity. When a tenant approaches the end of their lease term, landlords rely on MLAs as a roadmap to anticipate what might come next.
Most of the time a landlord is going to lean on an experienced and reputable broker to help them determine these factors. However, before making any assumptions, it's essential to walk the space under consideration. This allows you to assess its layout, condition, and how the current tenant is utilizing the space—insights that are critical to forming realistic and informed leasing expectations.
To build accurate MLAs, landlords and brokers assess the following key components:
- Lease Term
- Rental Rate and Structure (NNN, Gross, Modified Gross, etc.)
- Annual Increases (Rent Escalations)
- Tenant Improvements (TI)
- Leasing Commissions
- Concessions (Free Rent Period)
- Downtime/Vacancy Period
- Renewal Probability
- Renewal Terms
- Capital Reserves (Ongoing reserves for future capital expenditures)
Now that we have identified what we are looking for, how do we get there? Let’s tackle a replacement tenant first. Terms, rates, annual increases, TI, commissions, and concessions are all determined by the specifics of the building being re-leased and the current market conditions. When putting the building into a peer group, there are some things to consider:
- Size
- Age
- Condition
- Clear Height
- Functionality
- Location
Market conditions are where the rubber truly meets the road. Having a qualified and knowledgeable broker is invaluable. Brokers handle multiple deals from various landlords and tenants, providing them with a thorough perspective on what’s happening in the market.
To assess current market conditions effectively, consider the following key indicators:
- Completed Lease Comps
- On Market Competition
- Under Construction Competition
- Current Tenant Velocity (How many tenants are actively looking for space)
- Future market influences, including political developments or supply chain disruptions that could impact availability, demand, or pricing.
This gives a landlord an idea of what to expect moving forward, but the market changes quickly, and there are no guarantees.
The second part of the process involves evaluating whether the current tenant is likely to renew. Key factors to consider when making this judgment include:
- Financial Strength
- Length of Occupancy
- Space Functionality (This is why a walkthrough is essential.)
- Current Market Competition
- Proposed Renewal Rate
- TI Requests
Ultimately, the landlord must weigh the cost of renewing the existing tenant (if they’re interested) against the potential value of securing a new one. This includes evaluating current market conditions, determining whether the space requires significant improvements or can be leased “as is,” and understanding the broader economic landscape.
Every deal is unique, and having a strong grasp of market dynamics is essential before approaching a renewal or preparing for a possible vacancy.
