Passing Rent vs Market Rent: Why Every Investor Should Know the Difference

When you’re umming and ahhing over a commercial property, two numbers tell very different stories: the passing rent and market rent. They’re just one adjective apart, but they measure entirely different things.

And understanding the gap between them is one of the simplest ways to spot opportunity in commercial real estate.

Let’s break it down.

What is Passing Rent?

Passing rent is the amount the tenant is actually paying right now under their lease agreement. It’s the rent “passing” from tenant to landlord today. Nothing theoretical or estimated.

If a tenant signed a five-year lease three years ago at $400 per square metre, that’s the passing rent. Even if market rents in the area have since climbed to $450 per square metre, the lease rate remains what’s in the contract until the next rent review or renewal.

In other words, passing rent reflects current cash flow, not necessarily current value.

What is Market Rent?

Market rent, on the other hand, is what the property could lease for today if it were vacant and open to the market. It’s determined by looking at comparable rents in the same area for similar properties — factoring in things like location, quality, amenities and lease terms.

It’s a moving target that changes with supply and demand. When vacancy rates tighten, market rents rise. When the economy cools or incentives creep up, they soften.

Market rent reflects potential value, not the immediate income.

The Difference Between the Two

The difference between passing rent and market rent (sometimes referred to as the rent delta) tells you whether a property is over- or under-rented.

If passing rent is below market rent, there’s the potential for upside. When the lease ends or rent reviews kick in, the landlord can lift income closer to market levels. For a commercial property investor, that means potential to increase value over time.

If passing rent is above market rent, there’s likely more risk. When the tenant leaves, the property may re-lease at a lower rate, dragging down both income and valuation.

So while a high passing rent looks great on paper, it can sometimes disguise a future correction you’ll need to account for.

Why These Numbers Matter

Both figures matter. But for different reasons.

Passing rent shows what’s going into your bank account today, determining your immediate yield.

Market rent shows what the property should be earning in a fair, open market; it’s the figure valuers and buyers look at when determining the asset’s long-term value.

For most investors, the real truth lies in comparing the two. The wider the gap between passing and market rent, the more important it is to understand why.

Is the tenant paying less because the lease was signed years ago in a weaker market? Or is there something about the property that justifies a lower rate: poor location, outdated fit-out, inferior amenities?

Just the same, if rent is well above market, what happens at renewal time? Will the tenant re-lease at a discount or move elsewhere?

For Buyers Wanting to Add Value

For buyers, the delta between passing and market rent can be both an opportunity and a warning.

If you’re chasing value-add potential, look for assets where passing rent sits below market rent. When leases roll over, you can capture the uplift by bringing rents back in line with the market.

That’s a classic play for experienced investors and syndicators—buying a property with under-market leases, improving its income position, and ultimately realising a higher valuation on exit.

But if you’re after set-and-forget, passive income, a big rent gap might not be ideal. It can mean volatility when leases expire. In that case, you might prefer an asset where passing rent and market rent are roughly aligned, offering predictable returns rather than speculative upside.

In short: the right delta depends on your strategy.

How Market Rent Drives Valuation

When valuers assess a commercial property, they don’t just look at what the tenant is paying today. They capitalise the market rent (not the passing rent) to determine the property’s fair value.

That’s because a buyer isn’t just purchasing the existing lease; they’re buying an income-producing asset with a market-determined potential.

So, if the current lease is below market, the valuer may adjust the yield or adopt a “reversionary” approach, recognising the future upside. Conversely, if passing rent is above market, they’ll likely apply a discount or higher capitalisation rate to reflect the risk of income dropping once the lease resets.

In both cases, market rent is the anchor for valuation. It’s what connects the property’s income profile to its market price.

Why Market Rent Can Matter More

From a landlord’s perspective, market rent is where the real value sits. Passing rent comes and goes with lease terms, but market rent defines what your property is worth in the eyes of the market.

That’s why savvy landlords keep an eye on local rental trends, incentive levels, and new developments nearby. If market rents rise and you’re locked into an old lease, you’re missing potential value. If they fall and your rent is above market, your tenant may seek a reduction or walk away at expiry.

In either case, it’s the market rent—not the passing rent—that signals whether your asset is performing, overvalued, or ripe for repositioning.

So, remember…

Passing rent tells you what your property earns today. Market rent tells you what it’s really worth.

Both matter, but they serve different masters. For investors looking to add value, the gap between the two can be the hidden lever that turns an average purchase into a standout performer. For those chasing stability, alignment between them can mean fewer surprises.

So next time you’re reviewing a property listing or valuation report, don’t just skim the rent figure. Ask yourself: is this what the tenant’s paying, or what the market would pay? The answer could change your entire investment view.

Want more insights like this?

Subscribe to our monthly newsletter. You’ll join more than 2,000 investors enjoying our news, views and property insights.

Every article is free and you can unsubscribe anytime.