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Last week brought news of a 73,000-square-foot office lease inked at one of Manhattan’s recently upgraded office towers—Canaccord Genuity Group, an investment advisor, will be relocating to Vornado Realty Trust’s One Penn Plaza from 535 Madison Avenue and 33 Whitehall Street. With asking rents reportedly in the low $100s per square foot for this deal, mentions of the ongoing flight to quality trend were revived—Vornado has also reportedly spent $450 million to upgrade the tower over the last several years, including both interior and exterior refurbishments. 

Since 2020, the share of new transactions signed with starting rents of $100 or more has been on the rise each year in Manhattan, according to CompStak’s lease data. The perception is that these deals are closing at triple-digit rents because they are coupled with hefty concessions packages. This is partially true—concessions, including free rent periods and tenant improvement allowances, have increased across many transaction and building types in Manhattan’s office market, including prime and newly constructed buildings.

However, it is also important to understand concession ratios, which are the values of the free rent period and/or tenant improvement allowances relative to the total lease value (total rent to be collected by the landlord over the lease), especially as lease terms and transaction sizes have fluctuated post-2020. In this week’s blog, CompStak analyzed Manhattan’s average concession ratios and unpacked how they compared for Class A transactions above and below $100 in starting rent, as well as for Class B/C transactions in Manhattan. Furthermore, CompStak also compared concession ratios to those in the Bay Area, San Francisco, and Chicago, resulting in some intriguing findings. Read on for more in GlobeSt’s article.

The Average Concessions Ratio Has Increased Most Rapidly For Class A Deals with Starting Rents Below $100 Since 2018

The proportion of Manhattan leases executed with triple-digit starting rents in prime or newly constructed buildings has been growing. However, according to CompStak’s data, the proportion of the total lease value allocated to concessions has actually increased more rapidly for Class A deals with starting rents below $100 than for those above. Since 2018, the average concessions ratio for Class A deals with $100+ starting rents has risen 2.0 percentage points to 10.8%, while it has risen 4.3 percentage points for deals closing at starting rents below $100 per square foot. For the deals that are transacting in Manhattan Class B or C buildings over the same period, the concessions ratio has increased notably in 2023 deals year to date only, mostly due to an increase in tenant improvement allowances for this subset of the market. Otherwise, the ratio trended close to 2018-2019 levels over the past three years of closed activity in CompStak’s data. 

Concessions Ratio =

Total Value of Free Rent Period + Total Value of Work Package Received

___________________________________________________________

Total Rent Value of Lease 

(Including any escalations and does not subtract the free rent period) 

Although the concessions ratio for Class A deals with $100+ starting rents has risen from pre-pandemic levels, it has remained relatively stable from 2021 to 2023 year to date, hovering around 10.7% to 10.9%.  This plateau may be evidence of more competition at the top-end of the market as compared to all other properties. While all other properties have higher ratios and have shown recent upward trends, a stabilizing concessions rate for Class A deals with starting rents of $100 or more may indicate that landlords of new construction and/or trophy buildings are regaining some negotiating power, and there is stronger demand for this segment of the market.

Class A Deals with $100+ Starting Rents Have Seen Average Lease Terms Rise Above Both Pre-Pandemic Levels and 2020’s Low

Partly, the concessions ratio for Class A transactions with starting rents of $100 or higher has also not increased as rapidly as in the other two categories, largely due to significant expansion in average lease length from the lows of 2020. The average term for Class A deals with starting rents of $100 or more has expanded by over 23 months, representing a growth of 24.1% over this period, to a ten-year average. Over the same period, Class B/C term length has increased just 8.3% from its 2020 low. Meanwhile, in the case of Class A deals with starting rents below $100, the average lease term has been on an upward trend since 2020 but still remains over 7% below the level seen in 2018.

New York City’s Overall Average Concession Ratio Growth Outpaced Chicago, San Francisco and the Bay Area

Despite variations in concession ratio growth between Class A and B/C transactions in Manhattan, New York City’s overall concession ratio has shown a faster increase compared to other major office markets such as Chicago, the Bay Area, and San Francisco. While Chicago has had larger concession ratios than New York City from 2018 to the present, New York City’s ratio still grew faster, expanding by 3.6 percentage points since 2018. New York City also surpassed San Francisco’s 2.8 percentage point growth over the same period. The Bay Area trended differently, with the average concession ratio up just .10 percentage points to 8.1% for deals completed in 2023 year to date.  

What does rising concession ratios mean for the office market and for landlords and tenants?

Rising and elevated concessions ratios indicate that more of the potential income from each lease transaction is being given up to free rent periods or tenant improvement allowances for office-build outs. Ultimately, it is a sign that tenants still have a firm advantage in a market.  Furthermore, many office tenants are still seeking flexibility and are seeking shorter lease office leases. If a landlord is facing higher concession ratios on leases that are also rolling more frequently, this could be a substantial drain on their portfolio’s financial health. 

Want more insight into office lease data on CompStak? Contact us!

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