Freebies, Incentives Drive Office Rent Recovery

USA – Data from property consultancy CBRE revealed that the recent rebound in the country’s office rents is largely due to freebies, cash gifts, and other incentives given by property owners to their tenants, reported The Wall Street Journal on Tuesday evening (18 January, SGT)

These incentives have long existed in the commercial property market (office, retail, and apartments), particularly in places like San Francisco and New York City. But they have never been so hefty or so commonplace as they are in urban office markets nowadays, said property brokers.

In fact, office landlords are giving out months of free rent and tens of millions of dollars. Office building owners are shouldering moving expenses and paying for bespoke renovations. In return, office landlords are able to charge inflated office rents. But after the freebies are factored in, the rents are much lower than their face value.

Nowhere is this more evident than in Manhattan’s new office buildings. The average cash payment to tenants in the area’s priciest office leases surged by more than 2-fold from US$76 psf in 2016 to US$154 psf last year.

As a result, CBRE discovered that the amount of actual money office building owners collected from these leases declined 7.7 percent. But on the books, office rents of posh Manhattan office buildings rose by 1.6 percent.

“Face rents have not changed since the pandemic, but that’s not the story. The story is the fact that landlords are now receiving 20 percent less than what they had been receiving prior to the pandemic,” commented Jeffrey Peck, Vice Chairman at property consultancy Savills.

For many owners of office buildings, the COVID-19 pandemic is a huge threat that entails securing whatever deals they need to survive as vacancy levels hit levels not seen in decades.

Giving out freebies to inflate office rents helps maintain the high prices of office buildings despite the prevalence of remote work. This means office landlords can still profit when they divest their commercial property or apply for a mortgage.

This is because when investors and lenders compute property values, they partly base their calculations on the rents. High office rents also boost confidence in the broader real estate market, increasing the stock prices publicly-traded and attracting investors.