S&P Global Market Intelligence reported recently that, “it’s a good time to be in the market for prime New York City office space.”
“I think we’re starting to see a cycle that’s beneficial for tenants. It’s going to accelerate more.” Colp-Haber said in the report.
However, many tenants that are in the market are disappointed that base rental rates are still high. While base rental rates remain unchanged, what has changed are the concession packages being offered by landlords.
Concession packages are typically comprised of two elements:
- A work allowance, which is used to build or modify the space; and
- A rental abatement, also known as free rent.
In order for a tenant to determine the true economic deal they are getting, they must determine the Net Effective Rental Rate. The Net Effective Rental Rate is the base rent minus the work allowance and rental abatement. We always prepare a spreadsheet which shows the calculation of amortizing the work allowance and free rent over the term of the lease.
If a lease has base rent of $100 per foot, a work allowance of $90 per foot, and 14 months free rent, then the Net Effective Rental Rate is approximately $80 per foot.
When assessing the commercial real estate market and comparing lease terms for different properties, it is important to take landlord concessions into account. The Net Effective Rental Rate—which takes the base rent and subtracts the concessions—is the most effective means of measuring the real economic terms of a lease.
Interested in better understanding the various landlord concessions now available in the market? Please contact Wharton Properties for a consultation.