What Are Concessions in Commercial Real Estate?

Types of Concessions

Concessions vary by asset class and market conditions. The most common types fall into four categories.

Free rent

The tenant pays no rent for a specified number of months, typically at the start of the lease. One month free on a 12-month lease is the most common structure in multifamily. Commercial leases may offer 2 to 6 months free on longer terms.

Reduced rent

The tenant pays a discounted rate for an initial period before stepping up to the full contract rent. This is common in lease-up scenarios where properties need to fill units quickly.

Tenant improvement (TI) allowance

The landlord provides a per-square-foot allowance for the tenant to customize the space. TI allowances are standard in office and retail leasing, often ranging from $20 to $80 per square foot depending on lease term and credit quality.

Moving and other incentives

Some landlords cover moving expenses, offer gift cards, waive application fees, or provide furnished units. These are most common in competitive multifamily markets during lease-up.

Common Concession Types by Asset Class

Ranges based on NAA research and JLL market research. Actual concessions vary by submarket and conditions.

How Concessions Affect Effective Rent

Effective rent is the actual income received per month after spreading concessions across the lease term. It is always lower than the face rent when concessions are present.

Example: A 12-month lease at $1,800/month with one month free rent.

This $150 monthly difference ($1,800 face vs $1,650 effective) matters enormously at scale. On a 200-unit property, one month free across all units represents $360,000 in reduced annual income, directly impacting NOI and property valuation.

Underwriting Concessions in a Pro Forma

Concessions appear as a deduction between Gross Potential Rent and Effective Gross Income. The income waterfall follows this sequence.

1. Gross Potential Rent (all units at market rent, 100% occupied)
2. Minus: Loss to Lease
3. Minus: Concessions
4. Minus: Vacancy
5. Minus: Bad debt / credit loss
6. Plus: Other income
7. Equals: Effective Gross Income

When analyzing a deal, always use the rent roll to calculate actual concessions rather than relying on the seller's pro forma. Sellers often understate concessions or assume they will burn off post-acquisition.

When Concessions Signal Trouble

Concessions are normal in competitive markets, but elevated concessions can signal underlying problems. Two months free on a 12-month lease represents a 17% discount, which should raise questions about the property's competitive position.

Compare the property's concession level to market benchmarks. If competing properties offer zero to one month free while the subject offers two months, investigate the cause. Common drivers include deferred maintenance, poor curb appeal, below-market amenities, or submarket oversupply.

Rising concessions across an entire submarket indicate oversupply or weakening demand. This is a macro signal that affects all properties, not just the subject. Track concession trends over time by pulling data from the rent roll at each reporting period.

Concession Burn-Off in Acquisition Underwriting

Sellers often project that concessions will "burn off" post-acquisition as the market improves or after renovations are complete. Buyers should treat these projections with skepticism.

If you model concession burn-off, tie it to specific, measurable improvements: renovation completion dates, lease expiration schedules, or documented supply pipeline data. Generic assumptions like "concessions decrease 50% in Year 2" without supporting evidence are a common source of underwriting error.

The safest approach is to underwrite current concession levels as your base case and model burn-off only in the upside scenario. This prevents overpaying for a property based on optimistic income projections.

Why Landlords Prefer Concessions Over Rent Reductions

Concessions preserve the face rent, which matters for three reasons. First, property valuations are based on income, so higher face rents support higher appraisals. Second, future rent increases are negotiated from the face rent, not the effective rent. Third, neighboring tenants see the posted rate, not the concession, reducing pressure for across-the-board rent cuts.

The trade-off is transparency. Heavy concessions can mask true market conditions, making it harder for buyers to assess stabilized income without digging into the rent roll detail.

Where to Find Concession Data

Accurate concession data is essential for underwriting but can be difficult to source. Several approaches provide reliable information.

• Rent roll analysis. The most reliable source. Compare face rents to actual payments and identify any free-rent periods, discounted months, or concession notations on individual leases.
• Property management reports. Monthly reports from Yardi, RealPage, or Entrata typically track concessions as a separate line item. Request 12 to 24 months of data to identify trends.
• Market surveys. Companies like RealPage, CoStar, and ALN provide submarket-level concession data that can benchmark the subject property against competitors.
• Mystery shopping. Visiting competing properties and asking about current move-in specials provides real-time concession intelligence that surveys may lag.

Never rely solely on the seller's reported concession figure. Sellers are incentivized to minimize concession disclosure because higher effective rent supports a higher sale price.

Tools like Primer can extract concession data directly from rent rolls and leasing reports, eliminating the manual effort of scanning hundreds of lease records. This is especially valuable for portfolios with 200+ units where manual concession analysis can take hours.

Concessions in the Current Market

Concession levels fluctuate with supply and demand cycles. Markets with heavy new construction typically see higher concessions as developers compete for tenants during lease-up. Once the new supply is absorbed, concessions often decline.

When underwriting in a high-concession environment, consider whether the elevated concessions are structural (persistent oversupply) or cyclical (temporary lease-up competition). The distinction matters for projecting stabilized income.

Track concession trends over 12 to 24 months rather than relying on a single snapshot. A property with declining concessions is on a different trajectory than one with rising concessions, even if the current level is identical.

Concession Impact at Scale

The dollar impact of concessions grows quickly with property size. Understanding the math prevents the common mistake of dismissing one month free as "not a big deal."

This example shows how a seemingly modest concession program can reduce property value by over $1 million. Every concession dollar comes directly off NOI and gets capitalized at the prevailing cap rate.