As a real estate owner you’ve likely seen or heard the term ‘rent concession’. If you have vacancies or want to keep spaces leased, concessions are something to consider.
Real estate owners and investors generally consider these options during a sluggish rental market. When there is more supply than there is demand, concessions can help.
Rent concessions are a great way to attract new tenants to quickly fill a vacant space, or keep the existing tenants happy. Many times a concession is offered when a tenant’s lease comes up for renewal, and the offer entices the tenant to remain at the commercial property.
What is The Meaning of a Rental Concession?
The definition of a rental concession is “a compromise a landlord makes to the original lease terms in the hopes of attracting or keeping a tenant.” This means it can range from modifying the lease terms, tenant permissions, or other benefits mutually agreed upon.
This compromise can come in the form of a:
- First Month Rent Free
- Reduced Security Deposit
- Price Reduction
- Covered Moving Expenses
- Access to Property Amenities
- New Appliances or Space Improvements
- Other Methods You Choose
3 Types of Rent Concessions
Rent concessions are typically divided into three categories. There’s lease-up, red flag, and marketing.
- Lease-Up Concession
These are common for newly constructed commercial buildings. The goal is to provide concessions to help the property lease-up quickly and reach an occupancy amount that is profitable for the real estate owners.
- Red Flag Concessions
These are seen as cautionary concessions by lenders and financial institutions, when you’re purchasing or refinancing.
For example if you’re looking to buy or refinance a property with market rents, but there are ongoing concessions to keep the property occupied, this can signal bigger issues.
- Marketing Concessions
Commonly found at older investment properties (Class B or C), these concessions are used as a marketing strategy.
It starts by marketing the property with ‘above market’ rent rates, then the concession brings the rates in-line with ‘on market’ rent rates.
Unlike ‘Red Flag’ concessions, these aren’t of concern as long as the property is appropriately occupied and priced.
Why Should You Consider a Rent Concession?
In times of economic uncertainty and a sluggish market, your tenants may go out of business or lose their jobs. As a result they may have to vacate your space. You’ll then be left with vacant spaces and low demand to occupy them.
Rent concessions are a way to avoid tenants leaving and to quickly fill the spaces that do. There is no “one size fits all” approach for providing a rent concession. It’s best to get creative for ideas most valuable to your tenants. You can even consider surveying potential renters to see what they’d like.
Additionally, these concessions can be on a monthly, yearly, or on a one-time basis.
How to Avoid Vacancies
If your commercial building has many vacancies and turnover, you may need to conduct better underwriting of your tenants and their ‘credit’.