“When you look at comps, the comps won’t reflect the effective rates accurately,” said Brett Kluewer, managing director at Stream Realty Partners.
In the third quarter, average asking rents for Class A office properties in Los Angeles County were $4.02 a square foot, up 1 cent over the previous quarter, according to data from Jones Lang LaSalle Inc.
In the desirable Westside market, asking rents were $5.65 a square foot, up 18 cents over the previous quarter, according to JLL data.
Part of the reason asking rents are high in the face of rising vacancy numbers is that, instead of lowering rents, many landlords are offering concessions to get tenants into their properties. The practice is not new, but experts agree its use is increasing.
“We are seeing that landlords are being more flexible. They want to keep deal flow. Their pipeline has slowed down a bit since Covid, so they are considering more concessions but nothing that drastic,” said Sally Zesut, a vice president at Avison Young Inc.
Bill Bloodgood, an executive managing director and agency market leader at Newmark Knight Frank, said it’s difficult to tell tenants that “a transaction is no different today than it was pre-Covid.”
“There are minor concessions that are being given to help bridge that gap,” he said.
After the 2008 recession, Kluewer added, it took more than two years for rents to hit their low point. That could be the case again, meaning greater concessions or price decreases might still be on the way.
Some brokers don’t think prices will go down but said they expect concessions to increase.
“In the last 40 years, we’ve had three other slowdowns in leasing, and we are now entering into the fourth slowdown,” said Bill Boyd, an executive vice president at Kidder Mathews. “If this reduction in leasing velocity continues, we expect the market to behave as it did before, which saw rental rates flatten or pause and remain stable, and the concessions increase. A $3.50 rental rate wouldn’t necessarily go down, but there could now be six or seven months of rent abatement compared to five months a year ago.”
Zesut added that for businesses doing well, now is actually a good time to sign a longer lease and “take advantage of these concessions that we’re seeing.”
Higher building value
There are several reasons landlords are offering concessions, rather than simply lowering asking rents.
“The value-add owner is more focused on the value of their building, which is determined by the net operating income of the building, compared to a long-term owner who may be more focused on maintaining their monthly cash flow rather than give concessions and decreasing their cash flow,” Bloodgood said.
“It keeps the coupon rate higher, which lends itself to higher values for the building. If coupon rates are high, the building is worth more. If you can disguise how you are lowering the effective rates, you can maintain a higher coupon rate, which helps a higher evaluation of the building,” he said.
Kluewer added that property owners who have little or no debt or have lower leverage can stretch more than owners with debts to be.
“Landlords offering more concessions versus just reducing the rent is for their lenders,” Zesut agreed. “They try to keep the face rate high for the lenders and hold on to the value, so they don’t dilute the appraisal.”
Rent concessions can take a few forms. Most common are a few months of free rent, increased tenant improvement allowances, and free or decreased parking fees.
“We’re seeing deal specific and specific to what the tenant wants. A lot of landlords are giving free rent, and typically we are seeing one month free per year,” Zesut said. She added that most landlords would prefer that over tenant improvement allowances.
She said landlords in areas like the San Fernando Valley are offering discounted parking, but she is starting to see it more in other areas as well.
Kluewer said landlords are also granting longer beneficial access periods, or time used by tenants to get the space ready to occupy.
“We’ll see more beneficial access periods or longer beneficial access periods, higher tenant improvement dollars that can be applied toward base rent and longer free rent periods, as well,” he said.
He added that there is a growing amount of sublease space on the market now, which also isn’t shown in vacancy data.
Sublease space is usually offered at a discount over space leased directly from landlords. The spaces can pu
Rent concessions are not just happening in office properties.
Sean Burton, chief executive of multifamily development company Cityview, said concessions are being used in many communities, and areas like downtown are even seeing rents fall.
“What you’ve seen across the board is incentives really enticing people to move. We’ve seen those throughout most, if not all, markets we’re in. I think those are temporary,” he said.
Jaime Lee, chief executive of Koreatown-based Jamison’s leasing and brokerage arm, said the company has not been lowering rents, “but we have been offering concessions here and there to keep pace with the market.” She added that the company was doing it more in older buildings than at its newer properties.
Mark Weinstein, founder and president of Santa Monica-based MJW Investments, has done both.
“Whether it’s a concession or lower rent, we never had to offer any of that before, and now we have both,” he said.
And Brett Dedeaux, principal at Santa Monica-based industrial developer Dedeaux Properties, said in the early stages of Covid, some concessions, such as a few months of free rent, were given.
“At the beginning stages of Covid, to get some deals over the line, (we offered concessions), but now we’re not needing to do that,” he said. “The last few months, concessions have not been needed. There’s been competition for our projects and solid demand.”
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Retail Real Estate Market Shows Some Life After Months of Struggle
- Covid Softened Downtown Office Market in 2020
- Staples Takes Over Former Office Depot Space in Miracle Mile
- Tri-Cities Real Estate Market Sees Mixed Results
- Companies Seek Low-Rise Office Spaces in Reaction to Covid
- Hollywood Office Market Stays Strong Thanks to Media Companies Like Netflix
- Universe Holdings Acts to Boost Rent Collections
- Restaurants, Developers Line Up for Drive-Thrus