For owners considering land utilization, tenant management has 1.5-2x the profitability of residential rentals and is a promising option. However, without appropriate rent setting, profits cannot be maximized. This article explains tenant fee market data and professional rent determination methods.
What Is Tenant Management?
Tenant management is a land utilization method of earning income by renting out buildings or land occupied by company offices, restaurants, beauty salons, convenience stores, etc. There are 2 types: "rental income" (renting out the whole building) and "land rent income" (renting land only).
Merits of Tenant Management
- High profitability: Since tenants are corporations/businesses, rent is about 1.5-2x that of apartment/condo management
- Interior cost savings: Tenants don't require equipment, so initial costs can be reduced with skeleton delivery
- Running cost reduction: Insurance premiums and utility costs tend to be lower
- Security deposit system: Tenants typically pay a security deposit of 6-12 months' rent, and restoring the property to its original condition is generally the tenant's responsibility
Demerits of Tenant Management
- High vacancy risk: When a tenant leaves, finding the next one takes time
- Building customization costs: When renting to a specific tenant, customization costs may be borne
- Sensitive to economic conditions: During downturns, securing new tenants becomes harder, and withdrawal losses can be especially large for single-floor leases
- Earthquake insurance is unavailable: Tenant properties generally cannot be covered by earthquake insurance (a special rider is sometimes available, but at high cost)
- No property tax reduction: Residential land can receive up to a 1/6 reduction in property tax, but this reduction does not apply to tenant properties
Tenant Fee Market Rates by Type
Retail Space and Restaurants
In city centers, monthly 20,000-30,000 yen/tsubo is common. In rural areas it falls to 5,000-8,000 yen/tsubo. Corner locations on main roads command a 20-30% premium.
Offices
In central Tokyo, 25,000-60,000 yen/tsubo per month depending on grade. In regional cities, 5,000-15,000 yen/tsubo.
Industrial Properties (Warehouses, Factories)
Monthly 2,000-5,000 yen/tsubo. Access to expressways and loading facilities greatly affect value.
Reference: reported monthly rates by area (per tsubo). Tenant rent levels also vary significantly by a property's specific location, area, and floor. Reported monthly rates per tsubo for major areas are as follows.
| Area | All-Floor Average | 1st Floor | Above 1st Floor | Typical Range |
|---|---|---|---|---|
| Omotesando area | 42,600 yen | 60,600 yen | 32,600 yen | 30,000-45,000 yen |
| Shinsaibashi area | 16,600 yen | 29,000 yen | 13,450 yen | 20,000-25,000 yen |
| Tenjin area | 13,850 yen | 19,550 yen | 12,450 yen | 15,000-20,000 yen |
These figures are only a general guide. In addition to area, property specifications, building age, surrounding environment, and visibility also factor into rent determination.
Professional Rent Determination Methods
Cost Approach (Cost Method)
Setting rent calculated from land acquisition price + construction cost + profit margin. The basis of pricing for newly built properties.
Income Approach (Comparable Method)
Setting based on rent of similar properties in the area. The most commonly used method in practice.
DCF Method (Discounted Cash Flow)
A method for quantifying risk factors by discounting future revenue with a discount rate. Used primarily for large commercial buildings and office buildings.
Income analysis method: this approach sets rent based on how much income a business can earn from using the property. Appropriate rent is derived by taking the net income generated by the business and adding the necessary expenses borne by the landlord, such as taxes, maintenance costs, and depreciation. This method is especially effective for properties aimed at investors and professionals.
Turn-key properties: for turn-key properties (leased with existing fixtures and furniture), rent is judged including the value of the attached fixtures. Supply of such properties is limited, and rent can also vary depending on factors such as the position of entrances that affect customer flow. Because the cost of fixtures is sometimes included in "store fixture assets" or key money, it is worth confirming the breakdown before signing a contract.
For overall investment strategy for tenant management, see Why Is Real Estate Investment Difficult?
Reviewing Tenant Rent When Vacancy Continues
Market rent levels change every year. Taking into account the property's age and trends among nearby tenants, research the rent of tenants with similar size and building age via the internet or real estate companies, and consider a rent reduction if necessary. When the decision is difficult to make independently, consulting a property management company or real estate professional is effective.
FAQ
- Q. Is tenant rent negotiable?
- A. Yes. Especially at the time of contract renewal, tenants often request rent reductions. Maintaining rent levels by showing added value such as facility updates is important.
- Q. How long does it typically take to find a tenant?
- A. Varies greatly by location and type, but 3-6 months on average. For major cities and prime locations, it can be within 1-2 months, while rural areas and specialized properties may take over a year.
- Q. What are the precautions when setting tenant rent?
- A. Once set, rent is difficult to raise. Setting slightly low from the beginning invites long-term financial damage. Checking market rates and appropriately evaluating location superiority is important.
- Q. What is a guideline for lowering rent when vacancy continues?
- A. Compare with tenants of similar size and building age nearby; if the rent is 10-15% or more above market, that is a sign to consider a reduction. Consulting a real estate company is also effective.
- Q. Can earthquake insurance be obtained for tenant management?
- A. Tenant properties generally cannot be covered by earthquake insurance. Some insurers offer it as a special rider, but the premium is often high, so it should be confirmed in advance.
- Q. What kind of calculation is the income analysis method for tenant rent?
- A. This method estimates the annual net income of the business operating in the tenant space, subtracts the taxes, management costs, and depreciation borne by the landlord, and divides the result by month to set the rent.
