Office Landlords Now Offering More Than a Year of Free Rent

The average amount of free rent that office landlords are offering to secure long-term leases jumped 12.5 months in the first quarter. That was a 29% increase from a year earlier, according to CBRE.

Free rent has risen sharply since 2019. From Q1 to Q3 2019, free rent fell from 9.5 to 8.5 months before jumping back to 9.5 months by the end of the year, according to CBRE. From Q4 2019 to Q4 2020, free jumped from 9.5 months to almost 11 months. Then it rose more than 1.5 months in Q1 2021.

While free rent has increased, tenant-improvement allowances have stayed steady for newly signed leases of at least 10 years in term. CBRE reports that tenant improvement allowances have held constant at an average of roughly $70 to $75 per square foot.

With the uncertainty surrounding COVID-19, companies have held the upper hand in negotiations with landlords. But vaccinations and government stimulus are boosting consumer spending, which makes a robust economic rebound likely. Still, CBRE isn’t sure how soon that recovery will impact office leasing.

“Companies seeking long-term leases will find that asking rents haven’t come down much, but overall concessions have increased,” said Whitley Collins, CBRE global president of advisory and transaction services said in a prepared statement. “Those willing to get out in front of the full economic recovery can expect most landlords to be very accommodating.”

Base and net effective rents were positive in Q4 2019 and Q1 2020 before turning negative as the pandemic shut down the country in Q2 2021. In Q3, net effective rents for long-term leases fell by 14.0%, while base rents dropped by 10.8%. They began to stabilize in Q4 2020 and Q1 2021 with net effective rent down just over -5% and base rent at around -5%. CBRE thinks these rent declines getting smaller may be a sign that concessions could cool.

As things stabilized, new leasing activity has increased since December. “Occupiers are expected to fully reopen their workplaces once the U.S. reaches herd immunity to COVID-19, possibly as early as this summer,” according to CBRE. “This, coupled with resurgent economic growth, should result in increased demand for quality office space.”

Other firms see more challenges for the office space in the year ahead, with the national vacancy rate forecast to rise to “near-record levels” in 2021 before beginning a slow decline starting in 2024.

A report from Moody’s Analytics REIS predicts effective rents will decline 7.5% this year and that the sector’s recovery will take longer than expected. However, REIS analysts don’t think the decline will be as uniformly bad as predicted in the pandemic’s earlier days. “If the so-called office apocalypse has indeed been cancelled (for now) this does not mean that distress is not present; neither does it mean that there was no distress throughout 2020. The distress was simply very uneven,” it said.