CBRE: Office Lease Concessions Decline for First Time in 4 Years
(Illustration courtesy of CBRE)
The value of office-leasing concessions – including months of free rent – began to decline in the first half of this year and may be near a peak, according to a new report from CBRE, Dallas.
After four straight years of increases, the average length of free rent provided in new office leases declined in the first half of this year to 9.0 months from 9.6 months in 2023.
Similarly, the average tenant-improvement allowance – money that building owners provide occupiers to fit out their space – declined by nearly 3% to $94.69 per square foot in this year’s first half from $97.55 in 2023. That decline, as with the decline in free rent, came after four years of gains, CBRE found.
“This finding is an encouraging sign of better momentum in the market,” CBRE Americas President of Investor Leasing Mike Watts said. “But it does not mean that the office market has fully turned a corner. Part of the pullback in concessions likely can be attributed to financially strapped building owners reining in previously generous allotments of tenant improvement and free rent.”
When factored into the cost of a lease, such concessions contribute to a difference between what building owners ask in rent and the lesser amount the occupier actually pays, called effective rent. Rising concessions have depressed effective rent for much of the past four years, the report noted.
That influence is greater in lower-tier buildings, which often need to provide more concessions to entice tenants than top-tier buildings. CBRE’s analysis found that effective rents for lower-tier buildings declined by 1.2% since last year, while effective rents for top-tier buildings increased by 2.4%.
Jessica Morin, CBRE Director of Americas Office Research, said she is seeing some building owners turn to less costly concessions to attract tenants. “That can include providing shared services such as conference rooms by reservation, or more flexible terms for expansion or contraction of their office space,” she said. “Another option that many building owners are likely to consider is lowering their base rent.” (Base rent is the starting rent for the first year of a lease’s term.)