While U.S. office rental rates have risen steadily over the past few years, landlords have been pressured to offer tenants greater leasing concessions, including free-rent and tenant improvement allowances, found a study by Newmark Grubb Knight Frank. The study found that between 2008 and 2016, office rental rates have increased by 21%, while the average tenant improvement allowance per square foot has risen 66%, and the average number of months of free rent per year of lease term has risen by 73%.
Nationally, the overall vacancy rate has declined from 16.6% to 13.4%, while average asking rates have risen 17.1% to $29.64 PSF as of Q3 2016.
The study attributes the increased concessions to greater density and space-efficiency per square foot, especially by tech companies in California. “The result has been robust competition for large tenants as a slowdown in demand for office space has yielded muted net absorption and rising concessions.”
The report also provided its 2017 outlook for the status of leasing concessions in 12 major metro areas:
- Strongly Tenant Favored: Houston
- Moderately Tenant Favored: Chicago, New York, Washington DC
- Balanced Market: Atlanta, Boston, Los Angeles, San Francisco
- Moderately Landlord Favored: Dallas, Miami, Philadelphia, Phoenix
- Strongly Landlord Favored: None
Separately, a research report by JLL pointed out that the volume of lease transactions over 500,000 square feet dropped by 43% in 2016. JLL also cautioned that 6.5 million square feet under construction may be delivered in 2017, further increasing the national office vacancy rate. On a positive note, JLL noted that strong job growth and a robust economy will still help maintain demand for office space, especially in tech-focused markets, adding that the tech industry accounted for 24.4% of all office leasing activity in 2016.