Office Concessions Grow Under COVID

Office landlords are providing more concessions to their tenants under COVID-19, reported Trepp and CompStak.

“The concession numbers closely resemble the uptick seen during the 2009 Great Recession,” the data firms said in their The Impact of the COVID Disruption on the Office Segment report. Trepp now uses information from CompStak, a crowdsourced data platform.

CompStak Data Analyst Lucas Winter noted a 30 percent increase in the free rent ratio due to the current pandemic compared to the same period last year.

The report found a “clear spike” in the number of free months on a lease as a percentage of the total lease term. Free months averaged more than 5 percent of the total term for recently executed leases at the end of the second quarter. “This compares to the spike seen from 2009 to 2011,” the report said. “Since that point, there has been a steady decrease until this recent jump, which can be attributed to the current state of the market caused by the pandemic.”

For example, Trepp reported an insurance company’s 15-year lease at 28 Liberty Street in New York received six months more of free rent after re-trade negotiation. The lease was signed in the second quarter.

And extended free rent periods are not seen only in direct leases but in the sublease market as well, Trepp and CompStak said. “An advisory firm’s sublease at 900 3rd Street Avenue in New York received an additional five months of free rent after re-trade,” the report said.

Trepp Associate Manager of Research Catherine Liu said the most recent financials on office loans reflect the magnitude of the current economic downturn. She noted reported quarter-on-quarter net operating income and net cash flow values “have trended notably lower” in 2020 after logging a 2 to 5 percent growth rate since 2016.