Office Landlords Offer More Perks To Lure Tenants

GLOBAL – Owners of office properties in London, New York, and San Francisco are offering greater perks, including longer rent-free periods, in a bid to attract tenants, reported The Wall Street Journal on Monday evening (6 March, SGT).

Data for CBRE showed that in 2022, tenant improvement allowances were 23 percent higher compared to figures seen in 2019. Notably, tenant improvement allowances refer to money that landlords give to new tenants to be used for fitting out their office space.

While office landlords have also been waiving the rent for a portion of the tenancy before the COVID-19 pandemic, the rent-free periods are now longer.

Derwent London, an office property owner based in the UK, revealed last week that it waived 20 percent of the rent for two new leases. This is up from 17 percent in 2019.

In New York’s largest 10 office rental transactions last year, 7 percent of the tenancy were rent-free versus 3 percent in 2019. In San Francisco, the rate has more than doubled to 6 percent, according to data from real estate analytics company CompStak.

When these freebies are taken into account, office markets look weaker. In Central London, net effective rents for Grade A office buildings are 1 percent below pre-COVID levels, based on data from commercial property consultancy Carter Jonas. Comparatively, data from CompStak show that office rents in New York have only inched up by 1.9 percent over the same period.

But if the handouts are not factored in, Grade A office rents in prime London office space is up 1.3 percent from 2019, while that in New York increased by 5.7 percent over the same period.

Office property owners prefer to give freebies in the form of rent-free periods and tenant improvement allowances instead of slashing the rent, as doing so would negatively impact the value of their office buildings.

“Rent-free concessions are the shock absorber. If the headline rent is declining, capital values will fall, explained Michael Pain, a Partner at Carter Jonas.

But as a rule of thumb, the limit for rent-free period on a 10-year lease in London is about 33 months. Canary Wharf, a district partly-owned by the sovereign wealth fund of Qatar’s, was close to that rate in Q4 2022. Furthermore, shorter rent-free periods could be a sign that the office market is on the mend.