Mind the gap: Exploring the disconnect between base and net effective rental rates in DC office buildings

Base rental rates and net effective rental rates are two important metrics in the world of commercial real estate, and understanding the relationship between the two is a key distinction. Base rental rates, or contract rents, represent the negotiated rent that appears on a lease document, whereas net effective rents are the amount received by the landlord, less any concessions issues, which usually take the form of rental abatement or tenant improvement allowances (TI). As the way people work has structurally changed over the past 3 years, tenants are gaining an edge in terms of bargaining power, due to companies shrinking their footprint or electing to ditch their office all together and go fully remote. As a result of this, landlords have had to get creative and increase concession packages in order to lure from an ever-shrinking pool of tenants, in turn causing the gap between base rental rates and net effective rental rates to widen. When this gap widens, landlords ultimately end up making less money, with some landlords now even refusing to do leasing deals because the economics do not make sense. As we continue to monitor this trend, especially with the buildings going back to lenders amid turbulent financial markets, it will be interesting to see how the DC Metro market responds to the changing dynamics.