Long leases delay the signal
Office buildings lease space to organizations, often through multiyear contracts. Existing revenue can remain stable even when demand for new space weakens. Consequently, current occupancy and the next several years of expirations need to be considered together. A central business district tower, a suburban campus and a specialized research building can serve different needs. Building quality is not a universal label: location, transport, floor design, operating costs and the tenant's use determine practical competitiveness.
Effective rent beats face rent
A new lease may show higher stated rent while offering free-rent periods, substantial tenant improvements and commissions. These costs affect economic returns and cash timing. Leasing spreads also may compare different rent concepts or omit noncomparable space. Read the footnotes before comparing issuers. A signed lease is not necessarily commenced, and commenced space is not necessarily producing full cash rent during concessions. The gap between signed commitments and cash collection can be significant during a leasing recovery.
Competing views on recovery
A positive thesis might focus on tenants consolidating into better buildings and a shortage of suitable premium space. The counterargument is that gains for certain properties can coexist with weak aggregate demand and persistent vacancy elsewhere. Conversion to residential use is sometimes possible, but floor plates, windows, plumbing, zoning and project costs constrain feasibility. Treat conversion as a property-specific capital project, not an automatic floor under every office valuation. Both optimistic and cautious scenarios should incorporate time and funding.
The balance sheet is part of leasing
Inspect expirations by year, largest tenant exposure, sublease competition, tenant-improvement commitments and debt maturities. A landlord may need to spend before a new occupant pays. Same-store NOI excludes financing and can miss the burden of capital-intensive leasing. FFO reverses specified real-estate accounting effects, while issuer-defined AFFO requires a separate review of recurring expenditure assumptions. Examine secured debt, unencumbered assets and joint-venture obligations to understand which cash flows are available to common shareholders.
Hypothetical worked example
A hypothetical 10,000-square-foot lease quotes $50 per square foot annually for five years: $2.5 million in stated rent. Six months of free rent reduces receipts by $250,000. A $60-per-square-foot improvement allowance costs $600,000. Before commissions, operating expenses and discounting, remaining rent less that allowance is $1.65 million, equivalent to $33 per square foot per year. The example assumes fixed rent and full performance; actual timing and reimbursements change the economics.
A common mistake
Do not infer financial recovery from signed leasing volume alone. The combination of concessions, commencement timing and capital costs determines when shareholders benefit.
What to check in the disclosures
- Map expirations to debt maturities.
- Read free-rent and improvement assumptions.
- Compare cash and straight-line rents.
- Assess conversions building by building.
Sources & scope
This guide focuses on US REITs. Examples are hypothetical unless explicitly attributed. Definitions and issuer disclosures can change; use the current source and the issuer's own reconciliation.
Educational material, not a recommendation or personalized investment advice. How these guides are prepared · Report a correction