Rise in Concessions Lowers Net Effective Rents

Office lease concessions in the form of free rent increased sharply in 2020 as tenant demand fell to its lowest level since 2009. Free rent for long-term leases¹ hit an average of 12.5 months in Q1 2021, up from 9.7 months a year earlier. Tenant improvement allowances generally remained at an average of $70 to $75 per sq. ft.

Figure 1: Average Free Rent Concessions for Long-Term Office Leases

Source: CBRE Research, Q1 2021.

Free Rent Driving Net Effective Rents Lower

The increase in free-rent concessions pushed down net effective rents more rapidly than base rents. The biggest year-over-year declines occurred in Q3 2020 when net effective rents for long-term leases fell by 14.0% while base rents dropped by 10.8%. The pace of these rent declines decelerated in the past two quarters, perhaps as the prospect of widespread vaccinations buoyed landlord optimism.

Figure 2: Change in Base & Net Effective Rents

Source: CBRE Research, Q1 2021.

New leasing activity has increased since December, perhaps indicating similarly motivated occupier optimism. Occupiers are expected to fully reopen their workplaces once the U.S. reaches herd immunity to COVID-19, possibly as early as this summer. This, coupled with resurgent economic growth, should result in increased demand for quality office space.

Figure 3: New Leasing Volume Index

Source: CBRE Research, Q1 2021.

¹ New leases and renewals, excluding sublease space, greater than 10,000 sq. ft. with a term of at least 10 years.