These benefits are commonly known as concessions, hitting a record $173/sq. ft. in the first quarter in Midtown, up 3.3% from the previous year. This comes as a result of increased competition from new office space, specifically in West Side Manhattan.
Not long ago, owners of office buildings were offering rent reductions between five to seven months and tenant-improvement cash contributions of up to $70/sq. ft. Today, tenants get offers of anywhere from 12 to 15 months of free rent and landlord contributions between $85 and $100/sq. ft. While these concessions have been rising since the recession, brokers and analysts remain cautious. For example, historically low interest rates, have made concessions more affordable to landlords than that of previous real estate cycles.
“Higher concessions are not a sign of a weak market. As long as interest rates remain relatively low, owners would rather offer concessions today for higher rent profits in the future.” said Keith Knutsson of Integrale Advisors.
Landlords interested in boosting rent levels in order to maintain or increase the building’s value can negotiate higher rents with tenants, offering to cover a significant portion of construction costs and sometimes even take on the task of an office buildout, remodeling office space. They can make their returns when they refinance, recapitalize or sell their properties.