Commercial Office Model Structure
Executive Summary
Key Takeaways
- ✓ A commercial office model is built from a lease-level rent roll representing every tenant's specific lease terms, not a portfolio-average rent and expiry assumption.
- ✓ Weighted average unexpired lease term (WAULT) should be calculated as a live output of the rent roll, summarizing lease-expiry risk across the portfolio, not entered as a separate standalone assumption.
- ✓ Rent review mechanics (open market review, fixed uplift, indexation) and break clause options must be modelled per lease according to the actual lease terms, since a single blended escalation assumption cannot represent the range of review bases typically present across an office portfolio.
- ✓ Void periods and re-leasing costs (tenant improvement allowance, leasing commission, rent-free incentive period) should be triggered explicitly at each lease expiry or break event, not smoothed into a portfolio-level vacancy assumption.
- ✓ Tenant covenant strength should be tracked at the lease level, since re-leasing risk and achievable terms differ materially between a strong-covenant anchor tenant and a smaller, higher-risk occupier.
Institutional Definition¶
A commercial office model is built from a lease-level rent roll representing every tenant's specific lease terms, review basis, and expiry or break date, from which a weighted average unexpired lease term (WAULT) and expiry-specific void and re-leasing cost calculation are derived as live outputs. This lease-level granularity is what distinguishes an institutional-quality office model from a portfolio-average approximation, and follows the income-producing asset model base structure with office-specific detail.
The Lease-Level Rent Roll¶
Every lease should be represented individually: current passing rent, area, review basis, review or indexation dates, expiry date, any break option and its date, and tenant covenant strength. Building the rent roll at this granularity, rather than a portfolio-average rent and expiry assumption, is what allows every downstream calculation — WAULT, rent review escalation, void and re-leasing cost — to be traced back to the actual lease driving it.
WAULT as a Calculated Output¶
Weighted average unexpired lease term should be calculated as a live formula output of the lease-level rent roll — each lease's remaining term weighted by its rent or area contribution, summed across the portfolio — not entered as a separate standalone assumption disconnected from the underlying lease data. A model where WAULT is a hardcoded figure rather than a rent-roll-derived calculation cannot be relied on to update correctly as leases are added, renewed, or expire.
Rent Review and Break Clause Mechanics¶
Rent review mechanics vary by lease: open market review to prevailing market rent, a fixed contractual uplift, or indexation to a stated index (commonly CPI or RPI, subject to a cap and collar). Each lease's review basis should be modelled according to its actual terms, since a single blended escalation assumption applied across the whole rent roll cannot represent this range of review bases. Break clauses should be modelled as an explicit test at each lease's break date, typically with a stated probability or scenario assumption of exercise, feeding directly into that unit's void and re-leasing cost calculation if the break is assumed exercised.
Void and Re-Leasing Cost Treatment¶
Void period cost, tenant improvement allowance, leasing commission, and any rent-free incentive period should each be triggered explicitly at the specific lease expiry or break event, not smoothed into a portfolio-level vacancy assumption. Modelling these costs event-by-event preserves visibility into concentration risk around any single large lease expiry, which a smoothed portfolio-level vacancy rate would conceal.
Tenant Covenant Strength¶
Re-leasing risk and achievable terms differ materially between a strong-covenant anchor tenant and a smaller, higher-risk occupier. Tracking covenant strength at the lease level allows the void period and re-leasing cost assumptions for a specific unit's expiry to be set consistently with that tenant's actual credit profile, rather than a single portfolio-average re-leasing assumption applied regardless of which tenant is expiring.
Common Structural Errors¶
Portfolio-average rent roll. Modelling a single blended rent and expiry profile rather than lease-by-lease terms conceals concentration risk around individual large lease expiries.
Hardcoded WAULT. Entering WAULT as a standalone assumption rather than calculating it live from the rent roll risks it becoming stale as leases change.
Smoothed vacancy assumption. Applying a portfolio-level vacancy rate rather than event-specific void and re-leasing costs at each lease's actual expiry or break date.
Audit Checks¶
Rent roll granularity check. Confirm the rent roll is built lease by lease, not as a portfolio-average approximation.
WAULT formula check. Confirm WAULT is a live formula output of the rent roll, not a hardcoded input.
Lease-event cost trace. Confirm void and re-leasing costs are triggered at specific lease expiry or break dates, not smoothed into a portfolio-level assumption.
Best Practices¶
| Best Practice | Why It Matters |
|---|---|
| Build the rent roll lease by lease with full terms | Enables every downstream calculation to trace back to actual lease data |
| Calculate WAULT as a live rent-roll-derived output | Keeps the figure accurate as leases are added, renewed, or expire |
| Model each lease's review basis according to its actual terms | Represents the mix of review bases an office portfolio typically carries |
| Trigger void and re-leasing costs at specific lease events | Preserves visibility into concentration risk around individual expiries |
Further Reading¶
- RICS, Valuation — Global Standards (Red Book), Royal Institution of Chartered Surveyors
- Appraisal Institute, The Appraisal of Real Estate
Continue Reading¶
Prerequisites¶
- Real Estate Financial Modelling — the parent pillar
- Income-Producing Asset Model Structure
Related Technical Guides¶
Related Glossary¶
Related Products¶
How OXXON tests thisRun a free structural check with FMAE
Frequently Asked Questions
What is WAULT, and how should it be calculated in the model?
Weighted average unexpired lease term, the average remaining lease term across a portfolio weighted by rent or area. It should be calculated as a live formula output of the lease-level rent roll, summing each lease's remaining term weighted by its contribution, not entered as a separate standalone input.
How should rent review mechanics be modelled?
Per lease, according to the actual review basis stated in that lease, open market review, fixed uplift, or indexation to a stated index, since a single blended escalation assumption applied across the whole rent roll cannot represent the mix of review bases typically present in an office portfolio.
How should break clauses be treated in the model?
As an explicit test at each lease's break date, typically modelled with a stated probability or scenario assumption of the tenant exercising the option, feeding directly into the void and re-leasing cost calculation for that unit if the break is assumed exercised.
What costs should be triggered at a lease expiry or break event?
Void period cost (loss of rent and any non-recoverable service charge during the vacancy), tenant improvement allowance, leasing commission, and any rent-free incentive period offered to the incoming tenant, each modelled explicitly at the specific lease event rather than smoothed into a portfolio-level vacancy assumption.
Why does tenant covenant strength matter for the model, not just the valuation?
Because covenant strength affects the achievable re-leasing terms and downtime assumption for that specific unit, a strong-covenant anchor tenant's space typically re-lets faster and on stronger terms than a smaller, higher-risk occupier's space, and the model should reflect that lease-by-lease.
What is the most common structural error in office models?
Applying a single blended rent growth or escalation assumption across the whole rent roll rather than modelling each lease's actual review basis and expiry-specific void and re-leasing cost, which conceals concentration risk around any single large expiry.
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Exit Capitalization Rate
The exit capitalization rate (or reversion cap rate) is the rate applied to terminal-year net operating income to derive a real estate asset's projected value at the end of a discounted cash flow holding period. It is a distinct assumption from the discount rate used to present-value the explicit cash flow forecast, and conflating the two, using one rate for both roles, is a common sector-specific modelling error. The exit cap rate is typically set at a premium to the entry cap rate to reflect asset ageing and uncertainty further into the future.