Comparative Market Analysis for an Office Lease: Building a Comp Set and Using It

Picking the comp set for one offer

Start from the floor you have been offered and look for leases that could have been yours. A comp is a lease signed recently for a similar size, on a similar term, in a building of similar quality, close by. A handful of close matches is worth more than a long list of loose ones, because every loose comp needs an adjustment and every adjustment is a guess.

Listings do not belong in the set. An asking rent is an opening position. What you need is the effective rent on deals that closed, and that rarely appears in public. It sits in brokers' files, which is one reason tenants work with a broker at this stage.

Normalizing the offer to net effective rent

A proposal has several moving parts, and they have to become one number before it can stand beside a comp.

• Add up the rent for the whole term, with the escalations applied.
• Subtract the free months.
• Subtract the improvement allowance, or add what the buildout will cost you beyond it.
• Divide by the rentable square feet and by the years.

The result is the net effective rent per square foot per year. This worked example shows how the offer with the higher asking rent can be the cheaper deal.

Adjusting for what differs: floor, light, condition, term

No comp is identical, so write down the differences and decide which way each one pushes the price.

• The floor: its height in the building and its layout.
• Light: windows on one side or on several.
• Condition: raw, previously built, or furnished and ready.
• Term: a longer commitment earns more concessions, so a seven-year comp will show a lower effective rent than a three-year offer can expect.

Location needs the most care. Asking rents a few blocks apart can sit far apart, and the cause is the building stock and the block, not the square footage. The Penn Plaza floors below illustrate it: set what they ask beside one another before assuming a neighborhood has one price.

Setting the range, and spending it in the letter of intent

With the offer and the comps on one basis, the range is the span between your closest comps after adjustment. The offer either falls inside it or it does not, and the gap is your counter.

That counter goes into the letter of intent, the stage at which a number can still be moved with one sentence. Once lease drafts are circulating, the same change costs weeks. How to negotiate an office lease covers the order in which the terms get traded.

On a search, the tenant's broker prepares the comp set and the normalized comparison. In most transactions the landlord pays the broker fee, so the analysis is not usually a separate charge to the tenant.