B
OSTON - According to a recent report by CBRE, office leasing concessions such as free rent may be nearing their peak. After four consecutive years of growth, the average length of free rent offered in new office leases decreased to 9.0 months in the first half of this year compared to 9.6 months in 2023. Similarly, the average tenant improvement allowance (TIA) dropped by nearly 3% to $94.69 per sq. ft. in this year's first half compared to $97.55 in 2023. This decline in TIA also followed four years of increases.

    CBRE's findings were based on an analysis of 3,900 lease transactions in 12 major U.S. markets since 2019, including 393 transactions this year. According to Mike Watts, CBRE's Americas President of Investor Leasing, this trend is a positive sign for market momentum but does not indicate a full turnaround for the office market. The decrease in concessions may be due to building owners tightening their purse strings after previously offering generous allowances of TI and free rent.

    When factored into the cost of a lease, such concessions contribute to a difference between what building owners ask for in rent and what tenants actually pay, known as effective rent. Rising concessions have kept effective rent depressed for much of the past four years. This influence is more pronounced in lower-tier buildings, which often need to offer more concessions to attract tenants than top-tier buildings. According to CBRE's analysis, effective rents for lower-tier buildings decreased by 1.2% since last year, while effective rents for top-tier buildings increased by 2.4%.

    Jessica Morin, CBRE Director of Americas Office Research, noted that some building owners are turning to less costly concessions to attract tenants. These may include providing shared services such as conference rooms by reservation or more flexible terms for expansion or contraction of their office space. Another option that many building owners are likely to consider is lowering their base rent, which is the starting rent for the first year of a lease's term.

    The 12 markets included in CBRE's analysis are Atlanta, Boston, Chicago, Dallas/Fort Worth, Denver, Houston, Los Angeles, Manhattan, Philadelphia, San Francisco, Seattle, and Washington, D.C.