As pandemic-led pressures mount for office landlords, they are ramping up offers of free rent and larger tenant-improvement allowances to keep their space filled.
Such concessions rose sharply in Q2, according to CBRE, which reports that there was a 6.6%, year-over-year decline in net effective office rent in the 15 largest US markets. Net effective rent takes into account financial concessions that will be subtracted from a lease's contracted base rent. In comparison, base rent—before concessions—declined by only 1.1% in the second quarter from a year earlier.
CBRE reports that the average length of free-rent periods provided to induce a new lease signing or renewal in Q2 clocked in at 10 months—a 13.7% increase from the first-quarter average.
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Tenant-improvement allowances increased by 5.1% in Q2 from the first to $75.57 per square foot. That percentage gain might have been greater if not for declines in construction pricing, CBRE said.
Overall, US office-leasing activity declined by roughly 43% in the second quarter from a year earlier, according to Whitley Collins, CBRE Global President of Occupier Advisory & Transaction Services.
The market can expect to see landlords continue to rely more heavily on concessions to lease up buildings over the next 12 to 18 months, CBRE Chairman of Americas Research and Senior Economic Advisor Spencer Levy tells GlobeSt.com. After that, he predicts, the market will revert to being more landlord friendly. The current environment, he says, "is not a forever thing."
What would be more telling about the market are the terms a strategic lease, as opposed to these short-term transactions, might get, he says. Strategic leasing, according to Levy, means using leasing to grow a business in a strategic fashion, such as creating a corporate presence to attract talent. Those deals are on pause right now, he says.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
