Tenants moving to new offices in Washington D.C. receive larger concession packages from landlords than in any other major city in the U.S.
Tenant improvements are an important factor in property tax assessments that can offer appeal opportunities.
The average tenant in D.C. received $113.50 in improvements per square foot and 15 months of free rent last year, according to Savills Studley. For trophy and Class A buildings, the numbers are even higher with tenant improvements averaging $201.88 per square foot.
Concessions are particularly high in the District due to an elevated office vacancy rate and the rapid pace of new construction, explained Sarah Dreyer, Director of Research for Savills Studley.
"If you look at vacancy and availability, not just in D.C. but in the region, it's as high as it's ever been," Dreyer said. "The need to up the concessions and packages to lure tenants into space is there because it's very competitive. Tenants have a ton of options."
Receiving high concessions allows tenants to relocate with little to no out-of-pocket expenses. That has proven to be a huge incentive for law firms and associations to relocate their offices in D.C.
"One of the key reasons you're seeing such a massive amount of movement in the market is because you don't have out-of-pocket costs that affect partners' pockets or the need to raise capital through an organization," said Cushman & Wakefield Executive Managing Director Sherry Cushman. "In other markets where half is paid for by the landlord and the other half by the tenant, they are thinking twice."
While tenant concessions have skyrocketed, average office rents have not declined. Keeping “face” rents at the highest level possible for the market helps owners refinance and ultimately sell at a good price. They typically would rather pay the upfront cost of concessions in exchange for keeping rents up.
Sales are based on the cash flow of the building so it makes sense to give concessions to attract tenants. Then once the rent starts, it's a healthy rent.