Flexibility and adaptability have been key traits for just about every business or industry that’s survived during the COVID-19 pandemic. Commercial real estate owners and office space landlords are among those who’ve shown flexibility in an effort to keep their operations afloat by offering free rent, GlobeSt.com reports.
A CBRE report showed that free rent concessions increased significantly during the second quarter of 2020. There was a 6.6% year-over-year decline in net effective office rent in the U.S.’s 15 largest markets. Net effective rents examine financial concessions that are subtracted from a leases’ agreed upon base rent. Meanwhile base rent, the figure before rent concessions were factored in, only dropped by 1.1% in the second quarter of 2019.
How long will CRE free rent periods last?
The average free-rent period has been approximately 10 months, according to CBRE. The free rent window, which is meant to encourage new lease signings or renewals during the second quarter, is up almost 14% from the prior quarter. CBRE also noted that tenant improvement allowances went up by 5.1% in the second quarter from the first—to $75.57 per square foot.
Offering decreased or free rent is worth it to CRE owners who want to avoid having vacancies, especially when new lease agreement numbers are down. Office leasing activity decreased by almost 43% during the second quarter of 2020 compared to the same time frame last year, according to CBRE Global President of Occupier Advisory & Transaction Services Whitley Collins.
Tenants can expect their rent concessions to last another 12 to 18 months, CBRE Chairman of Americas Research and Senior Economic Advisor Spencer Levy told GlobeSt.com. Following that timeframe Levy forecasts the market will move more in the landlord’s favor.
“(The current environment) is not a forever thing,” Levy said.
Levy also noted strategic leasing becoming more prominent again is an indicator the office rent market is reverting back to normal. Strategic leasing is when a company uses leasing as part of its overall business strategy—such as developing a corporate presence to attract talent. Such deals are on hold for the time being, while short-term transactions are more commonplace, according to Levy.