Office Landlords Losing 24 Percent of Rent to Concessions for Class A Space
By Mark Hallum June 23, 2023 12:51 pm
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Landlords are losing more money to tenant concessions than before the pandemic with higher-end assets baking in more giveaways to sign deals.
Up to 24 percent of rent is being lost on average after concessions are accounted for in Class A buildings in Manhattan, while all asset classes are losing an average of 21.3 percent, according to report from Avison Young.
If a tenant is paying $100 per square foot, for example, that means $24 is coming back to them through a certain amount of free rent, furniture allowances or space being renovated at the landlord’s expense.
That’s an increase from even the pandemic when tenants were getting about 16.7 percent of their rent back through concessions, and it doesn’t look to be going down anytime soon, the report found.
“Quite frankly, I don’t see that number going down over the next several quarters,” Danny Mangru, regional director of innovation and insight for Avison Young, told Commercial Observer. “The demand is pretty tepid.”
Concessions have been a part of leasing for years, with six months of free rent likely on the table for an average 30,000-square-foot lease in 2008, Frank Wallach, executive managing director of research and business development at Colliers, told CO in April. But under today’s conditions, a tenant with a similar footprint can likely score about 14 months of free rent. And CBRE (CBRE) data found that 2022 had the highest amount of free rent and tenant improvement allowances for Manhattan leases since 2011.
From 2018 to March 2020, trophy and Class A assets were essentially at the same level in terms of concessions, with trophy towers losing 17.2 percent in rental profits compared to the 17.1 percent experienced by landlords with Class A buildings, according to the Avison Young report. Class B and C buildings lost less from concessions during that time, with about 15.4 percent.
From April 2020 to the present, trophy assets have averaged about 20 percent in concessions, while Class B and C saw about 21.2 percent.
Even though Class B and C buildings give away slightly less in concessions, they are in even worse condition than Class A properties because of lower demand for their space. Mangru predicted there are likely to be even more refinancings and repositionings, as well as the worst-case scenario of foreclosures, for Class B and C properties as the distressed leasing market continues on its current path.
To get these figures, Avison Young looked at lease deals above 20,000 square feet and with lease terms no shorter than seven years. Before COVID, the average lease term was 10 years, but now it’s looking to be between five and 10, Mangru said.
Mark Hallum can be reached at mhallum@commercialobserver.com.
