Rent Concessions

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Let's talk rent concessions.

Renters love to see them, property owners hate to offer them, but they're not always what they might seem.

Rent concessions are when you see something like "first months rent free" or something along those lines.

In some over saturated and overbuilt markets, you're seeing rent concession of up to 3-4+ months .

But why wouldn't property owners just lower the rents versus giving it away for free?

The answer is two fold; comps and valuation.

Comps: If you lower rent on one unit, or 3 units, to get them filled, you've now set the precedent that your market rent is lower. This opens the door for renewals, existing tenants, and future tenants looking for lower rent than you may have been getting. This is not a downward trend property owners want to be in.

This leads into valuation .

Valuation: Commercial multi-family property values are heavily influenced by their financial performance, ie. how much rent they're bringing in and ultimately their NOI, or Net Operating Income. In buildings where there are hundreds of units, even a small monthly decrease in rents can have a massive impact on value. You hope that eventually market demand rebounds, and you no longer need to offer these concessions.

Over-Simplified Example: In a 300 unit apartment building, lowering rents by just $50/mo across the board results in a $15,000 decrease in monthly income, or $180,000 a year.

Since commercial multi family valuations are often based on cap rates, if we apply a 6% cap rate to this property, that $180,000 decrease in annual income equates to a value loss of ~$3,000,000. (180,000 / .06)

So, by offering rent concessions, you're able to keep your market rents higher, which on paper, helps to prop up the value of the property.

Rent concessions aren't necessarily done out of desperation to fill vacancies, but rather a strategy that can be used to protect value, and incentivize tenants.