Office Concession Rates on the Rise: Leveraging Increasing Concession Ratios

Record vacancies are putting the pressure on landlords to pull in business- and the way they’re finding tenants is by offering more generous concessions.

However, the promises of these property owners may be a little bit bigger than their pockets because increasing concession packages are eating away at what’s left of their income.

So, let’s discuss the climbing concession trend taking place in the business capital of the world, New York City, and what it means for corporate tenants.

Climbing Concession Ratios

Commercial landlords are getting hit on all sides. On top of low demand and rampant devaluation, they are witnessing weaker return on investments for each tenant they do sign for their properties. Because in order to make corporate space attractive in the age of remote work, landlords are pumping up the average concession package they offer.

Concessions aren’t anything new, but what is notable is the significant increase experienced to the most common concessions post-pandemic.

The two stand-out concessions most commonly included are:

1. Free Rent Periods (Rent Abatement)
2. Tenant Improvement Allowances

We are witnessing dramatic gains to both of these inducements, specifically in metropolitan environments that have been struggling with a slower return-to-office movement. Manhattan in particular is the focus for this new era of concession standards.

Because of this, the average concession ratio taken on by landlords is building and against a backdrop of severe office devaluation, many are wondering how sustainable this model is.

Concession ratios refer to the discounts applied to the income value of a lease, typically offered by landlords to attract and retain tenants. A higher ratio implies more concessions provided, reducing the landlord's potential earnings from the lease.

But as concession ratios increase, landlords wonder whether securing a tenant at a lower rent but with fewer concessions could be more financially advantageous in the long run.

Because an increase in concession ratios is causing New York City landlords to take on a substantial hit. This hurts extra hard since the office has been devalued. And according to the Real Deal, "On average, landlords of top-tier office properties are losing up to 24 percent of rent on concessions in Manhattan."

Class A Buildings Offer Higher Concession Packages

Demand for Class A and trophy class properties are driving the demand for office space in Manhattan. This Flight to Quality in the office market means that there’s more competition among higher-end landlords. As a result, the top-tier property classes are also seeing the most dramatic gains in concessions.

In these Class A and beyond properties, rents top the triple-digit bases per square foot. Learn about The Manhattan Rent Crisis.

These premium properties are becoming more common because companies are largely cutting footprints to reinvest corporate real estate dollars in more streamlined, premium spaces. As a result, businesses are more willing to pay higher rent rates because they're generally taking on less square footage. Now, at the same time, businesses are seeing dramatic concessions as a way to offset the total cost of their occupancy, which makes paying for a premium property a lot more reasonable. 

The company continued, "This is partially true—concessions (including free rent periods and tenant improvement allowances) have increased across many transaction and building types in Manhattan’s office market, including for prime and newly constructed buildings.”

Learn how to find the best office for the best price. 

Across the board, Class A offices are witnessing the most concession offers. In this case, the concession ratio for buildings with starting rents under $100 per square foot have gone up by 430 basis points.

Now, this is not an increase without reason. Part of the suggested reason behind these new and improved concessions lies in the length of these leases (which are becoming longer).

So, landlords are offering more concessions in relation to longer lease terms. This makes sense because if tenants are committing to longer term leases, landlords are of course willing to pour in more incentives to their stay. Longer commitments from tenants means more sustained guaranteed income for property owners. In general, this gives tenants more leverage to negotiate with their landlords. Typically, the longer the lease term, the greater the concession package. 

In fact, it gives a more balanced picture of rent relationships between New York City landlords and tenants. Because by comparison, B- and C-Class term lengths were up only 8.3%. Not so coincidentally, they are also experiencing lower concession ratios compared to Class A assets.

But at the end of the day, growing concessions are causing landlords to lose money across the board. And according to the Real Deal, “All asset classes are losing a combined 21.3 percent of rent on concessions."

Manhattan Landlords Covering Soft Costs

Manhattan’s been in the news before about the concessions offered by the city’s landlords. At the end of last year, Manhattan’s property owners began bumping up their Tenant Improvement Allowances to cover soft costs. This was unheard of in a pre-pandemic leasing environment where costs included in the tenant improvement allowance were limited to structural improvements to the property that would benefit the landlord even after the tenant leaves.

And what happens in Manhattan has significant influence throughout the country. The city’s landlords initiated covering soft costs and tenants ate it up so much that it was viewed as the latest tactic to lure in office tenants.

Property owners observed that those who were offering to cover soft costs experienced a more expedited leasing process. And as a result, the trend began popping up across the country- even in states along the sunbelt that have maintained more consistent growth and financial stability in the CRE marketplace.  

According to Propmodo, “Average tenant improvement allowances across the sunbelt office market are up 16.2% from the end of 2019 to the second quarter of 2022. By comparison, work values are up 30.6% in a market like New York City or 31% in the California Bay Area.”  Learn more about Skyrocketing Tenant Improvement Allowances. 

So, the point is, what begins in New York City ripples throughout the country’s office markets. This means concession packages may have a similar path across the nation, further driving bargaining positions in negotiation.

Manhattan’s over-the-top inducements are growing faster than other cities still but, it is a notable trend for tenants to become aware of.

Tenants: Take Advantage of Increasing Concessions

Harness the increasing TIA concession ratio standard to your advantage during negotiations. Landlords who hesitate to offer premium concessions can be offset by others willing to provide better terms. With concession ratios on the rise, tenants hold significant negotiation power, even if they are already into their lease term. Exploring renegotiation possibilities, especially if committing to a longer lease, can lead to more tenant improvement dollars and improved lease terms, as landlords value the stability of guaranteed income.

On top of this, the trend towards more generous concession packages is a positive development for commercial tenants. It offers increased flexibility to customize workspaces, empowers negotiation for better lease terms, and supports business growth without significant upfront costs. Tenants can create appealing, efficient, and sustainable environments that enhance employee productivity and attract top talent which is critical in an era where stand-out offices are needed to bring employees in.

So, use this as a powerful negotiation tactic. To learn the other methods to find the best office for the best price, check out the following course.