Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
Leasing concessions are increasing in the office sector, but how far landlords are willing to go to secure tenants amid a pandemic depends on the office product and metro area.
Office lease concessions are generally in the form of:
- Free rent
- Tenant improvement (TI) allowances
Both rose sharply in the 2nd quarter of 2020 as U.S. office demand fell the most since 2009. Net effective rents for office space dropped by 6.6% from the second quarter of last year.
During the second quarter alone, the period of free rent on office leases averaged 10 months…up by 13.7% from the first quarter of the year, prior to the pandemic’s peak and widespread stay-at-home orders.
Rent relief is the one that’s requested most because that’s the most immediate. However, TIs could also be in play for any sort of health concerns where the landlord might need to reconfigure the office so that the tenant feels safer in that space.
Tenants are also likely to see increased flexibility regarding term length and options. In addition, opt-out clauses are becoming more of a trend now.
The pain is not spread evenly
Declines in net effective rents were more severe in the 15 largest office markets than the national average, due to the COVID-19 crisis affecting big cities more acutely in the initial stages of the pandemic. But not all office markets are seeing a vast increase in concessions for tenants.
In those markets, like Nashville, they have not been a significant amount of requests for concessions on existing leases since the pandemic. Most of the activity or lack thereof is with delays in decisions on new deals. If those companies had near-term expiration dates, they’ve been getting short-term renewals, one to two years, and those typically include concessions on short-term transactions.
Total U.S. office leasing volume declined by 42% from the first quarter to the second quarter of 2020, with at least 10 markets seeing a decline of 45 percent or more. Markets that saw the most significant declines include Chicago, San Francisco and New York City.
Though we expect to see some uptick in activity in the 3rd and 4th quarters, markets will continue to soften in the face of the pandemic downturn. Rising availability presents tenants with more options in the market and a flux of sublease spaces competing with direct space will eventually put downward pressure on base rents.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com