These Are the Effects Landlord Concessions Have on Apartment Rents

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Negotiation strategy requires a grasp of macroeconomic and local factors.

During the last year, it’s become clear that multifamily owners and operators have been using concessions to draw renters in. But a new report from Moody’s Analytics suggests that the use is broader and effective rents are taking a hit.

Effective rents, Moody’s points out, are not one of the typical metrics those in the industry use to judge performance, either of an individual property or collectively for the market. And yet, they are important. Provide concessions and the result may something that strengthens a mutual relationship to the benefit of each.

It’s a trend that has expanded. “The growing divergence between asking and effective rents indicates that landlords, confronted with rising vacancies, are offering larger concessions to attract tenants,” Moody’s wrote. This trend suggests that in periods of high vacancy, the balance of power in lease negotiations may shift towards tenants, as landlords are more motivated to fill their spaces. Rising vacancies can create opportunities for tenants to secure more favorable lease terms.”

The concessions can quickly add up. A $55 per square foot per year on a 10,000 square foot office space asking rent that turns into $50 a square foot for a 5-year-lease term, six months free rent, and a tenant improvement allowance of $5 per square foot results in an effective discount of 20%.

There are trends, like when a vacancy rate is lower than its long-term average, landlords offer less in concessions, and when they are higher, landlords increase the concessions. “However, there seems to be a plateau in the rent discount, indicating a ceiling beyond which landlords are reluctant to increase discounts, regardless of how high the vacancy rate is relative to the long-term average,” they wrote. “This could be due to various factors, such as landlords’ operational costs, financial commitments, or an anticipation of a market recovery. This observation underscores the complexities involved in rent negotiation strategies.”

Individual property characteristics also affect the amount of concessions. “Therefore, concessions serve as a key indicator of market sentiment, reflecting landlords’ response to changing demand,” they wrote. “Currently, with rising vacancy rates due to decreased office utilization, we’re seeing an increase in concessions as landlords strive to attract tenants.”

The result could seem on the trivial side —a cross between a supply-and-demand curve and price-driven marketing. But it does point to how a greater understanding of price negotiations requires a grasp of macroeconomic and local factors that could drive rent price optimization.

Source: GlobeSt.