Market lease rate is the current rental rate that a space would likely command in the open market, indicated by current rents paid for comparable space within a given market. A lease executed at the market lease rate is said to be “at market” or “market rate.” Leases with rental rates greater than or less than the prevailing market rate are said to be “above market” or “below market, respectively.
A landlord may offer below market rates to attract new tenants. This doesn’t mean the landlord isn’t generating an income on the lease. As long as the lease covers the landlord’s expenses, the terms will be profitable.
However, compared to other leases in the area, a below market lease may not generate as much income as its competitors. If the landlord’s expenses are lower than its competitors, the lease's profit margin can be more profitable than higher-priced leases.
If the market favors tenants, a landlord may have no choice but to offer a below market lease to attract tenants. Profits will be compressed when this happens. In that case, the landlord may choose a shorter-term lease so that he can raise rents once market conditions favor landlords again.
Of course, the price is not the only negotiating tool that tenants have. They can also negotiate many aspects of the lease. If enough potential tenants balk at the idea of a shorter-term lease, the landlord will have to once again offer more favorable tenant terms.
It works the other way as well — if the market favors landlords, then they are the ones that will hold most of the negotiating power. As there are few properties to choose from, tenants will be more inclined to accept restrictive terms.
