The line I hear from buyers is this: don't buy commercial, it's too hard to rent. Sometimes that is true. A building can be in the wrong spot, in poor condition or built for a use nobody wants any more. But the reason I look at first is simpler, and I can check it before I buy. It is the rent.
A property is over-rented when the rent the tenant pays today is higher than what the next tenant would pay for the same space. That gap does not show up while the current tenant is in place and paying. It shows up the day they leave, or the day the rent is reviewed. This page is how I check for it before I buy, and what I do when the check fails.
"Commercial is hard to rent": when that is true
Some commercial property does sit empty for a long time. Empty space has more than one cause, and it helps to keep them apart.
The Property Council of Australia's July 2026 Office Market Report puts Adelaide CBD office vacancy at 16.3%, up from 15.5% in January. Press coverage of the report says most of the empty space is in older buildings, as tenants move to newer ones, and that new buildings completing is part of the story too. That is a building and supply problem, and no rent adjustment would fix it for a tired building in the wrong spot.
I keep that in mind because it is the opposite case. A building can be fine and still be hard to let, because the rent being asked is more than a tenant will pay. That is the one I can test with paperwork, and it is where I start.
What over-rented means, in plain English
There are two rents to compare. Passing rent is what the tenant is paying under the lease today. Market rent is what a new tenant, with no history and no special deal, would agree to pay for the same space on today's terms.
If passing rent is higher than market rent, the property is over-rented. The reverse, where passing rent sits below market, is called under-rented, and it can be an opening for a buyer. I do not assume either one. I check.
I wrote about how the headline rent can mislead in face rent vs effective rent and in commercial passing rent vs net income. This page sits next to those. The question here is narrower: is the rent itself above what the room would let for?
How an over-rented property ends up sitting empty
It rarely happens on purpose. The rent was set when the area was stronger, or the tenant was given a high rent in return for a rent-free period or a fit-out payment. Or the lease built in fixed increases each year, and over time they ran ahead of what similar space was letting for. I cover that last point in commercial rent reviews in Australia.
While the tenant stays, the numbers on the sales flyer look fine. When the tenant leaves, the owner asks the old rent, because the price paid was based on it. Tenants compare the space with other space on the market. If the asking rent is above that, the sign stays in the window.
The owner then has two choices. Hold out for the old rent and carry the empty months, or accept a lower rent, often with an incentive such as a rent-free period, to get someone in. Either way the buyer who paid a price based on the old rent has paid for income that is not coming back. During the empty months the owner still pays rates, insurance and other costs that the tenant used to cover. I go through that in recovering outgoings vs market rent.
A simple example, in round numbers and for illustration only. A small shop has a tenant paying $100,000 a year. Similar shops nearby are letting for about $80,000. A buyer who values the shop at $100,000 of rent, using a yield of 8%, gets $1,250,000. The same method on $80,000 gives $1,000,000. The 8% is a round number for the maths, not a market figure. The point is the gap of $250,000 between the price paid and the price the next tenant's rent would support. The building has not changed. Only the rent did.
For a self-managed super fund this matters more, because the fund has to carry the empty months from its own cash and its own limited contributions. What can go wrong with commercial property in an SMSF sets that out.
Checking today's rent against what the next tenant would pay
I do this before I make an offer, and I use evidence rather than the selling agent's opinion alone. I ask for the rent schedule and the lease, including any side letters. Then I look for recent lettings of similar space nearby, not just what is being asked, because asking rents are hopes and lettings are facts. I also look at how long any empty space nearby has been on the market, and at what the owners of that space would accept.
I compare like with like. That means the same type of space, similar size and condition, and the same lease type. A rent on a net lease, where the tenant pays outgoings, is not the same number as a rent on a gross lease where the owner pays them. Gross lease vs net lease explains the difference. I also strip out any rent-free period or payment to the tenant, so I am looking at the rent the tenant really pays.
Finally I get a view from someone whose job it is. That can be a local leasing agent who is not selling the property, or a valuer's rental assessment. A figure I can show in writing is worth more than my own guess.
| Check | What I ask | Why |
|---|---|---|
| Passing rent | What does the lease say the tenant pays today? | The starting number |
| Incentives | Were rent-free periods or payments to the tenant built in? | The real rent can be lower than the headline |
| Recent lettings | What have similar spaces nearby actually let for? | Evidence, not hope |
| Empty space nearby | How long has it been on the market? | Shows what tenants will not pay |
| Lease type | Does the tenant pay outgoings, or do I? | Rents only compare on the same basis |
| Next review and expiry | When can the rent change, and who decides? | When the gap would show up |
Market rent reviews and cap and collar clauses
How the lease changes the rent over time decides when an over-rented property would be corrected, or whether it can be. A market rent review means that on a set date the rent is reset to what the market would pay for the space. If the property is over-rented, a market review is the point where the rent could move down.
Some leases put limits on that. A cap sets the most the rent can go up at a review. A collar sets the least it can be, so the rent cannot fall below a set level. A collar can lock in a rent that is above the market. Some leases also have a clause that says the rent can never go down at a review. Whether any of these apply, and how tightly, is in the lease, and retail leases are treated differently from other commercial leases in each state, so that part is for your solicitor.
I read the review clauses for two reasons. They tell me when an over-rented property would be tested, and they tell me whether the rent is able to fall to a level a new tenant would accept. A lease with a rent above market and a collar that will not let it fall is the one I look at hardest. The full list of review types is in commercial rent reviews in Australia.
What I do when a property is over-rented: price it in or walk
If the evidence says the rent is above market, I do not argue with it. I do one of two things.
The first is to price it in. I work out the value from the market rent, not the passing rent. I allow for the empty months and any incentive a new tenant would expect, and I check that the lease term left and review dates do not put the problem right after settlement. If the price I can pay on that basis is not close to what is being asked, I say so. I do not predict what the property will return. I am checking that the price does not rest on a rent that may not last.
The second is to walk. I walk when the selling agent cannot show how the rent compares with similar space, when the review clauses stop the rent falling to market and the lease is short, or when the whole case for the price rests on the headline rent. Walking away from a deal before exchange is a cheap decision. Fixing it afterwards is not.
In practice I would walk from a deal like this 9 times out of 10. I generally buy property that is at or under market rent, so I am not paying for income that may not last. Pricing it in is the exception, not the plan. The wider sequence I run on every commercial deal is in commercial property due diligence.
Questions to take to your adviser or accountant
I am a buyers agent. I find, check and negotiate the property. I do not give financial, tax or legal advice, and the questions below belong with your licensed adviser, accountant and solicitor.
Ask your solicitor what the review clauses mean in this state for this type of lease, including any collar or clause that stops the rent falling. Ask your accountant how any incentive the seller is giving the tenant, or any one you may need to give, would be treated. Ask your adviser how an empty period would affect the way you hold the property, especially if the buyer is a super fund. And ask for the lease evidence in writing, so each of them is working from the same pages.
Next step: Ready Check
If you are looking at a commercial property and the rent looks high for what it is, start with the Commercial Ready Check at go-commercial. It looks at your capital, the income you need and the risks you are comfortable with, before you spend time on a building. If the answer is not yet, you will hear that from me first.
Frequently asked questions
Is commercial property really hard to rent?
It can be. Empty space has several causes, including the building's age and condition, its location and how much new space has come onto the market. Rent is one cause, and it is the one I can check before buying. A building that is hard to rent in one case can let quickly in another at a different rent.
What does over-rented mean in commercial property?
It means the rent the tenant pays today is higher than what the next tenant would pay for the same space. It usually does not matter until the tenant leaves or the rent is reviewed.
What is the difference between passing rent and market rent?
Passing rent is what the lease says the tenant pays now. Market rent is what a new tenant would agree to pay for the same space on today's terms. When passing rent is higher, the property is over-rented.
What is a cap and collar on a rent review?
A cap sets the most the rent can rise at a review and a collar sets the least it can be, so it cannot fall below a set level. A collar can hold the rent above the market. Whether a lease has either, and how they work in your state, is a matter for your solicitor.
Can I tell if a property is over-rented before I buy?
Often, yes, if the evidence is available. I compare the lease rent with recent lettings of similar space nearby, adjust for incentives and lease type, and get a written view from a leasing agent or valuer. If the seller cannot provide the lease and the rent schedule, I treat that as a reason to be careful.
General information only. This is not financial, tax, legal or credit advice and does not consider your objectives, financial situation or needs. Lease terms and retail lease rules vary by state and by lease. Seek licensed professional advice specific to your situation before acting. Individual results vary.
