Occupiersí Incentives And The Real Estate Cycle

The rent levels reported by real estate agents remain relative stable, despite the fact that the vacancy rate increases. Landlords seem unwilling to adjust the long-term rental rate. Instead of decreasing the asking-rent they attempt to attract tenants by providing additional financial benefits which do not influence the long-term rental rate. Incentives such as rent-free periods, free hard fit-outs, re-location cost compensation, and furnishing contributions offer this prospect. It seems logical that the extent of offered incentives is related to the phase of the real estate cycle. Throughout the declining phase, when the vacancy rate is high, incentives are common and their extent can be substantial. In a recent study an average incentives level of twenty percent is reported for the Amsterdam region. In addition, the extent of offered incentives also depends on the attractiveness of the specific office property or unit in question. The rent level reported by real estate agents is not corrected for offered incentives. Therefore, the figure provides a distorted view of the current market dynamics. Consequently, it complicates the comparison of the quality to price ratio of different properties. This paper aims at determining an empirical relation between the vacancy rate and the extent of offered incentives. For an accurate analysis spatial and qualitative segmentation is deemed necessary. Data from ROZ-IPD Netherlands Property Index is employed to establish if the extent of incentives correlated with the reported vacancy rate. The ultimate goal is to construct an incentive correction factor, which depends on the vacancy rate, for reported rent levels. This facilitates an enhanced comparison of the office property quality to price ratio.