Flex Industrial Renewal: Comparable Adjustments and Effective Rent
An owner must decide whether to renew a 20,000-square-foot suite in a 60,000-square-foot flex building built in 1988 with 24-foot clear height, four dock-high doors, and two drive-ins. The tenant pays $8.50 per square foot NNN and asks for a five-year renewal at $8.60 with $3 per square foot TI and three months free. If the tenant leaves, the owner expects eight months of downtime, a 6% leasing commission, and $2.50 per square foot TI. Market evidence: Comp A, built 2019, 36-foot clear, leased at $10.75 NNN three months ago with no concessions; Comp B, built 1992, 24-foot clear, leased at $8.25 NNN 14 months ago with six months free on a five-year term; Comp C, built 1985, 20-foot clear, leased at $7.60 NNN eight months ago with $4 per square foot TI; Comp D, built 2021, 32-foot clear, asking $11.50 but vacant nine months. Submarket vacancy is 6.8% overall, 4.2% for modern product, and 9.5% for older flex; 450,000 square feet is under construction and 60% preleased.
1. Select the most relevant comparables and adjust them to conclude a market rent range for the subject suite. Show the adjustment logic.
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Comp A is newer with 36-foot clear and eight docks, so it is superior to the subject. A downward adjustment of $1.50 to $2.00 gives an indicated range of $8.75 to $9.25.
Comp B is the closest on age and clear height, but the lease is 14 months old and includes six months free. Its effective rent over five years is $8.25 × (54/60) = $7.43. Adding modest time/face-rent adjustment of $0.25 to $0.40 gives an indicated range of roughly $7.65 to $7.85. The concession cannot be ignored just because the face rate looks close.
Comp C is inferior with 20-foot clear and two docks. An upward adjustment of $0.75 to $1.00 gives $8.35 to $8.60 before TI. The $4/sf TI amortized over five years equals $0.80/sf per year, so the effective occupancy cost is around $8.40 to $9.40; the lower end supports a face rent near $8.40.
Comp D is an asking rate for vacant space, not a closed lease. At $11.50 with nine months vacant, it signals a ceiling for modern product but should not set the subject rent.
Conclusion: market rent for the subject is approximately $8.40 to $8.75 NNN, midpoint $8.55. The current $8.50 is at market, and the tenant’s $8.60 request is within the supported range.
2. Compare the tenant’s renewal proposal with the re-leasing alternative on a five-year effective-rent basis.
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Renewal proposal:
- Face rent: $8.60.
- Free rent: three months over 60 months = 5% of $8.60 = $0.43/sf per year.
- Effective rent before TI: $8.17.
- TI: $3.00/sf ÷ 5 years = $0.60/sf per year.
- Net effective rent: $8.17 − $0.60 = $7.57/sf.
Re-leasing alternative:
- Face rent at market midpoint: $8.50.
- Downtime: 8/12 × $8.50 = $5.67/sf of lost rent.
- Leasing commission: 6% × $8.50 × 5 years = $2.55/sf.
- TI: $2.50/sf.
- Total costs: $10.72/sf over five years = $2.14/sf per year.
- Net effective rent: $8.50 − $2.14 = $6.36/sf.
The renewal is superior by about $1.21/sf per year, or about $121,000 over five years on 20,000 sf. It also avoids exposure to a 9.5% older-flex vacancy rate and construction that is 60% preleased. Recommendation: renew if the tenant’s credit is acceptable, but document the TI payout and default remedies.
3. The tenant counters at $8.25 face rent with $4.00 TI and no free rent. Do you accept, counter, or reject?
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- Effective rent: $8.25 − ($4.00 ÷ 5) = $7.45/sf.
- Compared with re-leasing at $6.36/sf effective, the counter is still better by about $1.09/sf per year, or about $109,000 over five years on 20,000 sf.
- Compared with the market midpoint of $8.55, however, it is a below-market face rate with above-market TI.
Do not reject automatically. Counter with either $8.40 face and $3.50 TI, or $8.25 face with $3.00 TI and a seven-year term so the TI is amortized over a longer period. Add a clawback requiring prorated TI repayment on early default. Accept only if the tenant’s credit is sound and no stronger user is in the market. Given 9.5% older-flex vacancy and new supply, a below-market renewal can still beat a long downtime, but the owner should not give away both face rent and TI without term protection.