The Art of Leasing Incentives in Commercial Real Estate

Most property owners can simply put up a leasing sign, post a listing online, and wait for the phone to ring. However, many owners want to differentiate their property from the competition, and that’s why they look to their agents to creatively market their property and attract activity to the listing. One way we do that is by offering leasing incentives.

On the tenant side, these incentives are concessions offered by a landlord to get a new tenant to sign up and can also be used to get an existing tenant to renew a lease. Another form of incentives is broker incentives for the procuring broker that represents the tenant. These can include touring bonuses for qualified tours as well as commission bonuses for deals that get signed. While broker incentives can be a useful tool, this article will focus more on tenant incentives.

TRENDS

The most popular form of tenant incentive that we see is rent abatement that offers the tenant a free rent period. It is designed to catch attention because, after all, who doesn’t want free rent? For the tenant, this incentive can bring down the overall “effective rent” that they will be paying. For the landlord, they can maintain their “face rent,” and the property value can be preserved. Most of the time, we see the free rent at the start of the lease term. For a retail or restaurant tenant, this can give them time to build out the space with tenant improvements and get up and running. For office and industrial tenants, this can offset moving costs, help create a transitional moving period from the previous location to the new location, and help avoid paying double rent on two locations. Other times, we see the free rent spread throughout the lease term. For example, on a 3-year lease, we may see free rent on months 1, 13, and 25. By spreading it out, the landlord will be collecting the monthly rent sooner; however, it is worth noting that if there are annual rent increases in place, then the value of the abated rent further on in the term will be higher, thus bringing down the total leasehold value. Another method of rent abatement is having the tenant pay a reduced rent for a specific period, such as half rent. This can be beneficial to a landlord in that the reduced paid rent can be used to offset operating expenses such as property tax, building insurance, and CAM so they don’t need to come out of pocket on these items while waiting for the full rent to commence.

VARIATION

While free rent is a general type of incentive, different types of property listings may see different types of more specific incentives being used. Marketing that is focused on anticipated tenant needs is a no-brainer. For example, in a retail lease, it is common to see tenants customizing their spaces with tenant improvements specific to their use, so a retail leasing incentive may be based on the tenant receiving a TI allowance. Sometimes landlords will do the work, and other times the tenant will do the work and be reimbursed by the landlord upon completion. With office listings, tenants often have furniture and equipment that they need moved, and they can receive a moving allowance being offered as an incentive. This can often be based on a certain dollar amount on a per square foot basis. Another more specific type of leasing incentive is to offer free parking. This can be attractive in a market that has limited on-site parking available. It can also be a benefit to offer reserved parking if a landlord is able to make it available.

These are just some of the leasing incentives that we use in commercial real estate. If you are an owner looking for a brokerage to creatively market your property, please reach out to any of our agents to discuss further.

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