Placepoint

Market rent

Market rent (markedsleie) is the rent a leased unit can achieve in an open market, that is, what an independent tenant is willing to pay for a comparable premises or dwelling on comparable terms. The term is a reference point: you use it when setting the rent in a new agreement, adjusting the rent in a running agreement, or assessing whether a property's rental income sits above or below what the market actually pays.

For housing, the reference point when entering a new tenancy agreement is the rent level that is common for new lettings of similar premises on similar contract terms, see Husleieloven § 3-1 (the Norwegian Tenancy Act). Once the tenancy has lasted at least two years and six months, both parties can demand that the rent is adjusted to gjengs leie (prevailing rent in running tenancies) under Husleieloven § 4-3. Gjengs leie is an average of the rent in running tenancies for similar premises, and is typically lower than market rent because it also captures older, unadjusted contracts. The two terms are legally distinct: market rent applies when an agreement is entered into, gjengs leie applies when running agreements are adjusted.

For commercial property, market rent is not regulated by law in the same way, but it is a central term in commercial rent and valuation. Here, market rent is assessed from what comparable premises in the same area and segment are let for, adjusted for differences in standard, location, the tenant's ability to pay and contract terms. Because commercial leases vary widely in what they include of shared costs and fit-outs, rent levels are often compared as net effective rent, where rent-free periods and landlord contributions are stripped out to give a genuine basis for comparison.

Market rent is not static. It moves with supply and demand, the economic cycle, interest rates and how much new space is being built in the area. A property can therefore have a contracted rent that drifts away from market rent over time, either because the contract is old, or because the market has changed. The difference between contracted rent and market rent matters in valuation: if the contracted rent sits below market rent, there is potential for higher cash flow when the contract is renegotiated, while a rent well above market rent carries a risk of a drop at renewal.

In practice, market rent is rarely settled with certainty. It is estimated from actual leases in comparable buildings, the market knowledge of agents and advisers, and official statistics. For commercial property, several providers publish periodic market reports with rent levels by area and segment. Because the basis is an estimate, different assessments of the same premises can give somewhat different market rents, and the range is often just as informative as a single point estimate.

In Placepoint you can look into rent levels and comparable properties in an area, so you can weigh market rent against a property's contracted rental income and expected cash flow. Report: Tenants is clear that the rent level, which is what market rent ultimately determines, is not something the registers can answer.

From Placepoint's dictionary: Market rent

More information: Husleieloven § 3-1, Husleieloven § 4-3, Store norske leksikon: husleie

English: Market rent (markedsleie; the rent a property can achieve in an open market).

Common questions we come across

What is market rent?

Market rent is the rent a premises or dwelling can achieve in an open market, what an independent tenant will pay for a comparable unit on comparable terms. It is used as a reference when the rent is set or adjusted.

What is the difference between market rent and gjengs leie?

Market rent is the level for a new letting today. Gjengs leie is an average of the rent in running tenancies for similar premises, and is typically lower because it also includes older, unadjusted contracts.

How is market rent set for housing?

For a new letting, the starting point under Husleieloven § 3-1 is the rent level that is common for similar premises on similar terms. Adjustment of a running tenancy follows the rules on gjengs leie in Husleieloven § 4-3, which both parties can demand after at least two and a half years with no change other than index adjustment.

Why does market rent matter in valuation?

The difference between contracted rent and market rent affects the value. A contracted rent below market rent gives potential for higher cash flow at renegotiation; a rent above market rent gives a risk of a drop at renewal.

How do you compare market rent for commercial premises?

Often as net effective rent, where rent-free periods and landlord contributions are stripped out, so that premises with different contract terms can be compared on the same basis.