NEW YORK CITY—Rents in some of the nation's top-tier office locations are at or near their peak, and owners are bolstering the case for charging them through record levels of concessions to tenants. So says Savills Studley in the new 2017 Savills Studley Effective Rent Index (SERI), which sees the effects especially pronounced in Manhattan, San Francisco and Washington, DC.

“We expect these markets to trend down as we see more price resistance and potentially a slight decrease in 2017,” says Keith DeCoster, Savills Studley's director of US real estate analytics. “Tenants continue to stick to a strict regimen of space densification, whether it is the shrinking of Manhattan law firms and banks, the federal government radically reducing the space allocated per employee in DC or tech companies dialing back on office space in San Francisco.” He adds that “in these three leading-edge markets, landlords kept rents elevated only by boosting concession packages.”

In the case of Midtown Manhattan, rents in 2016 climbed nearly to peak levels despite a year of subpar leasing. That being said, SERI data show that concessions climbed nearly three times as fast as net rents: 10.2% compared to 3.6%.

As a result, tenant effective rents in Midtown climbed just 1.1% year over year in '16, to $81.45 per square foot, while landlord effective rents were nearly flat at $43.20 per square foot. That compares to 2015's 13.1% increase in tenant effective rents and 2014's 10.4% increase.

SERI shows that San Francisco office owners achieved higher rents through elevated concessions, following the pullback in the IPO market and sharp devaluations of many tech firms. “Many companies had to roll back expansion plans, a few cut payroll and shed excess space,” according to the SERI report for that city. “Nevertheless, rent rose as a handful of deals in the very highest-caliber properties boosted averages,” resulting in an 11.6% spike to $78.05 per square foot. However, concessions rose even more dramatically, gaining 22.4% on '15 averages to reach $89.38.

In the nation's capital, concessions also rose along with face rents. SERI reports that concessions rose to $137.27 in '16, up from $135.57 in '15 and $111.50 in 2012. Tenant effective rent nevertheless jumped by 7.3% to $48.74 and landlord effective rent spiked by 13.1% to $20.27. Even so, DC landlords' effective rent was still 22.3% below the $26.68 peak of 2011.

“Compared to most other U.S. office markets, demand in Washington, DC is extremely vulnerable and tentative,” according to the DC SERI report. “The arrival of a new administration that has promised to disrupt the federal government may create even more impediments to leasing activity.”

It's safe to say, says Savills Studley SVP Gerald Prager, that “the days of continued tenant effective rent increases in these metros are coming to a close. In the upper echelon of the market, landlord favorability has peaked for this cycle and we anticipate the market becoming more and more favorable to tenants over the course of 2017.”

Although a number of top US metros are seeing the growth in office rents winding down, others still have room to run. Tenants in Atlanta, Tampa and other lower-cost Sunbelt markets, plus a handful of cities such as Chicago and Los Angeles that were slower to recover from the recession, are likely to see further increases in occupancy costs this year. Savills Studley cites tightly controlled construction along with relatively sustained demand as drivers for continued rental rate growth in these markets.

Instant Insights /

Concessions Spike in Top-Tier Office Markets

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