Leasing arguments are conducted in rent per square metre; the decision turns on months of vacancy, and on the costs an empty unit keeps running.
Compare the present value of letting today with the present value of letting later at the higher rent, charging every month of extra vacancy with both the rent forgone and the landlord's holding costs. On an illustrative 1,000 m² unit with an offer at 240 per m² and an agent who believes 265 is achievable, waiting breaks even at 3.3 months over a five-year horizon. If the agent expects nine months, the rent would have to be 316.41, nearly a third above the offer.
Worked in full in The Real Estate Asset Manager by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every vacancy produces the same argument. The leasing agent has an offer on the table; the asset manager believes the market will pay more. The argument is usually conducted in rent per square metre, which is the one number that cannot settle it, because the cost of waiting is measured in months and the benefit in years.
| Input | Value |
|---|---|
| Area | 1,000 m² |
| Offer on the table, per m² a year | 240 |
| Rent believed achievable by waiting | 265 |
| Uplift | 25 (10.4%) |
| Rent-free period on either letting | 6 months |
| Empty rates while vacant, per m² a year | 32 |
| Non-recoverable service charge while vacant | 48 |
| Insurance and security while vacant | 6 |
| Holding cost while vacant, per m² a year | 86 |
| Discount rate | 7% |
| Analysis horizon | 60 months |
A month of waiting therefore costs 20,000 of rent that would otherwise have started accruing, plus 7,167 of holding cost: 27,167 a month. The higher rent is worth 2,083 a month, or 25,000 a year, once it is paid.
PV(accept) = Σ rentoffer from month 7 to month 60, discounted monthly
PV(wait w months) = −Σ holding cost for months 1 to w + Σ renttarget from month w + 7 to month 60
Break-even w: PV(wait) = PV(accept)
Monthly rate = 1.071/12 − 1. In Excel, lay the two options out as monthly rows, take =NPV(rate,range) of each and Goal Seek the difference to zero by changing the waiting period. A rough undiscounted check: the gain is 25 × 1,000 × (54 − w) ÷ 12 and the cost is 27,167 × w, which balance at 3.8 months.
Accepting today is worth 897,573 in present value. Waiting three months and achieving 265 is worth 906,482, 8,909 more. Waiting six months is worth 823,313, already 74,260 worse. The two lines cross at 3.3 months.
| Option | PV | Versus accepting |
|---|---|---|
| Accept 240 today | 897,573 | 0 |
| Wait 3 months, let at 265 | 906,482 | 8,909 |
| Wait 6 months, let at 265 | 823,313 | −74,260 |
| Wait 9 months, let at 265 | 741,538 | −156,034 |
| Wait 12 months, let at 265 | 661,136 | −236,437 |
Turn the question round, because the agent's real claim is about timing. If the honest estimate is nine months to find the tenant at the higher level, the rent that makes waiting worthwhile is 316.41 per m², 31.8 per cent above the offer. At three months it is 262.46, at six 287.74 and at twelve 349.21. A 10.4 per cent uplift pays for roughly a quarter of a year. Anything longer needs a different market, not a better agent.
| Case | Break-even, months |
|---|---|
| Target rent 250 | 1.4 |
| Target rent 265, base case | 3.3 |
| Target rent 280 | 5.1 |
| Holding costs ignored | 4.4 |
| Ten-year horizon instead of five | 6.0 |
| Five-year horizon, sale price capitalises the rent at 6.25% | 13.8 |
The last line explains most hold-outs. If the building is sold at month 60 and the buyer capitalises the rent at 6.25 per cent, every extra 25 per m² adds 400,000 to the exit value, and the break-even stretches to 13.8 months at 265 and 21.7 months at 280. That is the valuation argument for protecting headline rents, and it is legitimate only to the extent that the buyer will pay for the headline. A buyer who reads the rent-free period and the time it took to let will not, and the income answer, 3.3 months, is the one that survives due diligence.
The common mistake is to count only the rent forgone and forget that an empty unit costs money. Leave out the empty rates, the non-recoverable service charge and the insurance and the break-even rises from 3.3 to 4.4 months, and the rent needed for a nine-month wait falls from 316.41 to 295.75. A holding cost of 86 per m² a year is more than a third of the rent on offer, and it is paid for certain while the higher rent is only expected. Write every line of it into the comparison before the leasing meeting, not after.
Record the decision. Whichever way it goes, note the offer, the rent expected, the expected wait and the break-even on file. If the space is still empty at the break-even date, the decision has already been lost and the next offer should be judged against the new break-even, not against the old asking rent.
A higher rent buys a surprisingly short wait: here 3.3 months for a 10.4 per cent uplift, because each month of vacancy costs a full month of rent plus 7,167 of holding cost. Ask the agent for the expected wait, not the expected rent, and compute the rent that wait requires. The free accept-or-hold-out workbook runs the comparison with every line of the holding cost, and a related article prices the same trade-off for a development pre-let.
Compare the present value of letting now with letting later at the higher rent, charging the waiting period with lost rent and holding costs. On an illustrative unit, accepting 240 per m² today beats waiting for 265 unless the wait is under 3.3 months. Valuation considerations can justify holding out longer only if a buyer will genuinely capitalise the higher rent.
Typically empty rates or property tax, the share of service charge the landlord cannot recover, insurance and security, plus marketing. In the illustrative case they total 86 per m² a year, 7,167 a month on a 1,000 m² suite, which shortens the break-even wait from 4.4 to 3.3 months.
Solve for the rent at which waiting and accepting have equal present value. With an offer at 240 per m², a six-month rent-free period on either letting, 86 per m² of holding cost and a 7 per cent discount rate over five years, a nine-month wait needs 316.41 per m², 31.8 per cent above the offer.
Chapter 8 of The Real Estate Asset Manager sets out the accept-or-hold-out decision; the free companion workbook quantifies it with every line of the holding cost. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 324 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.