Definition
Concessions are incentives offered by a landlord (or seller) to win a tenant (or buyer), usually without reducing the headline price as aggressively. In rentals, concessions are commonly used to increase leasing velocity, reduce vacancy, and compete with new supply.
Why Concessions Exist
Concessions are a tool for balancing occupancy and price. Instead of cutting the face rent (which can reset comps and renewals), owners may offer temporary value to the tenant:
- Speed lease-up: boost absorption when availability is high.
- Protect “asking rentsâ€: maintain a higher face rent for marketing and future renewals.
- Target specific units: lease hard-to-rent floorplans, exposures, or buildings.
- Compete: match incentives offered by nearby properties without advertising a lower rent.
Common Types of Rental Concessions
- Free rent: “1 month free on a 12-month lease†(often applied to month 1 or month 2).
- Reduced rent for a period: discounted rent for the first X months.
- Waived or reduced fees: application, admin, amenity, parking, or pet fees.
- Gift cards or move-in credits: cash-equivalent incentives.
- Deposit specials: reduced deposit, deposit alternative programs (depending on market norms).
- Upgrades: free storage, upgraded unit, or included services (internet/cable bundles).
Face Rent vs Effective Rent
Concessions make effective rent lower than the advertised rent. Underwriting should focus on effective rent because it reflects real revenue.
Simple effective rent formula
- Effective Monthly Rent = (Face Rent × Lease Term Months − Value of Concessions) ÷ Lease Term Months
Example
A unit is advertised at $2,000/month on a 12-month lease with 1 month free. The effective rent is:
- Total face rent = $2,000 × 12 = $24,000
- Concession value = $2,000
- Effective rent = ($24,000 − $2,000) ÷ 12 = $1,833/month
If your underwriting assumes $2,000 market rent without accounting for concessions, you will overstate income and likely overpay.
Investor Uses
- Underwriting lease-up: model concessions explicitly during stabilization (and burn-off timing).
- Diagnosing demand: rising concessions can signal weakening demand even if occupancy looks steady.
- Revenue management: choose between lowering rents vs offering time-limited incentives.
- Exit planning: buyers will underwrite to effective rents; persistent concessions can hit value.
Common Pitfalls
- Ignoring concessions in comps: comparable “$2,000†rents may be $1,850 effective after specials.
- Assuming concessions vanish instantly: markets can stay incentive-driven longer than expected.
- Mis-timing the cost: free rent often creates a near-term cash flow dip that impacts reserves.
- Confusing occupancy with pricing power: high occupancy achieved through heavy concessions is not the same as strong demand.
- Not tracking by unit type: concessions may be concentrated in one floorplan or building.