Net effective rent is the true economic rent a landlord collects after subtracting every concession embedded in the deal: free rent periods, tenant improvement allowances, leasing commissions, moving expenses, and any other one-time costs the landlord bears to land the tenant. Without this normalization, comparing two leases on face rent alone produces misleading conclusions. A lease at $40/sf with twelve months free and $80/sf of TI over a ten-year term may have a lower net effective rent than a lease at $32/sf with no concessions — and only net effective rent reveals the true economics to investors, underwriters, and asset managers.
The calculation takes the total base rent the tenant will pay over the lease term, subtracts free rent months, subtracts the landlord's TI allowance, subtracts leasing commissions (typically 4-6% of total rent), and divides by the rentable square footage and the lease term to produce an average annual rent per square foot. The straight-line version gives equal weight to each year's concessions; the present-value version discounts future rent at a defined rate (often the landlord's cost of capital, typically 6-8%) to produce a PV effective rent that reflects the time value of upfront concessions relative to future rent payments. Both are used in institutional practice — straight-line for simplicity, PV for precision.
Net effective rent is the standard comparison metric in market rent surveys published by brokerage firms and data providers. When Cushman & Wakefield or CBRE reports that effective rents in a submarket rose 5% year-over-year, they are reporting the net effective rent after concessions, not face rents. This distinction matters because in soft markets, landlords often hold face rents steady (for reasons of market signaling and existing tenant parity) while dramatically expanding concessions, which means face rents tell you nothing about actual market economics. In rising markets, the reverse often happens: face rents rise but concessions stay constant, so effective rents grow faster than quoted face rents. Following only one number gives an incomplete picture.
Effective rent is also the metric that matters most in institutional underwriting and investment committee approvals. When an asset manager proposes a new 10-year lease at $50/sf, the committee asks for the effective rent including all concessions, the effective rent relative to market comparables, and the IRR impact of the deal versus alternative tenants or holding strategies. The answer to those questions depends on stripping every concession out of the quoted rent and calculating what the landlord actually nets over the full term. For corporate occupiers, the same calculation runs in reverse: the occupier wants to ensure that what they are paying net of all concessions is genuinely competitive with the market, not just superficially attractive at the face rent level.
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