Concession Rates Rising in Some Major Metros

There’s no such thing as a free lunch, as most everyone knows. You have to pay for what you want. In the office leasing work. That is apparently also true according to a compStack analysis of lease transaction data, as the cost of concessions is going up.

“The perception is that these deals can close at triple-digit rents because they are coupled with hefty concessions packages,” the company wrote. “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.”

But, as compStack notes,  it’s important to look at concessions ratios. Those are the comparisons of the free rent periods and tenant improvement allowances to the total rent the landlord will collect over the lease period, “especially as lease terms and transaction sizes have wavered post-2020.”

In other words, concessions ratios are effectively discounts to the income value of a lease. The higher the ratio — the greater the total of concessions — the less the landlord can make on the lease. At some point, it might reasonably raise the question of whether a different tenant at a lower rent but with fewer concessions might be more valuable.

Take Manhattan, for example. “The proportion of Manhattan leases executed with triple-digit starting rents in prime or newly constructed buildings has been growing,” the firm wrote. “However, compStak’s data shows that the share of total lease value going to concessions has actually risen faster for Class A deals with starting rents below $100 than for those above.

The average concessions ratio for Class A office buildings with starting rents of more than $100 a square foot have risen since 2018 200 basis points to 10.8%. For Class A office properties with per square foot starting rents below $100, the concessions ratios have gone up by 430 basis points.

For Manhattan Class B or C buildings, the concessions ratios only shot up in 2023 only, “mostly due to an increase in tenant improvement allowances for this subset of the market.” Without that factor, the ratio for B and C buildings were close to 2018-2019 levels.

Another thing to consider for the Class A transactions is that as starting rents topped $100, average lease term lengths have increased. “The average term for Class A deals with $100+ starting rents has expanded by more than 23 months or 24.1% over this period to 120 months(10 years) in lease term length,” the firm wrote. “Overall, these tenants are committing long term when executing these high value transactions.” B- and C-Class term lengths were up only 8.3%.

However, the term lengths do extend the period over which a tenant provides income, so helps balance concessions.

Concession ratios in New York aren’t the sign of the times for all metros. “Despite differences in concession ratio growth for Class A and B/C transactions in Manhattan, New York City’s overall concession ratio has grown faster than those for other major office, “including Chicago, Bay Area, and San Francisco, for example. While Chicago has always outranked NYC in terms of concessions ratios, New York City’s ratio has increased by 3.60 percentage points since 2018, outpacing San Francisco’s growth over the same period of 2.80 percentage points over the same period. The Bay Area trended oppositely with concessions ratios up just .10 percentage points to 8.1% as of deals completed in 2023 year to date.”

The big overall point for compStack was that growing concession ratios show the negotiation power tenants still have.