Companion to: Real Estate Decoded Chapter 15 (Office Reset) - Workbook tab 05_Office
Inputs
Outputs
Tenant improvement total
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Free rent (NPV at face)
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Leasing commission
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Downtime carry (no rent)
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Total cost of re-tenanting
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Cost per leased SF
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Effective net rent ($/SF/yr)
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How to read this tool: Post-COVID office acquisitions look cheap on $/SF but expensive on effective rent. The TI allowance for a 10-year lease in CBD office runs $100-200/SF. Free rent runs 8-18 months. The acquirer who underwrites face rent without backing out re-tenanting costs is buying a fee-grabbing trap.
What this tool is for
Office is the asset class undergoing the most material reset since 2008. The institutional buyer pool has shrunk dramatically; the lender pool more so. Acquisitions in 2024-26 frequently price below replacement cost - but the cost of re-tenanting can eat the entire perceived discount. This tool gives you the discipline.
Benchmarks the practitioner watches
- CBD Class A TI: $100-200/SF on new lease
- Suburban Class B TI: $60-100/SF
- Free rent: 12-18 months on 10-year lease (current cycle)
- Leasing commission: 4-6% of total contract value
- Downtime to lease post-vacancy: 9-18 months in current cycle
Common mistakes
- Underwriting face rent as effective rent - the gap is 30-50% in the current cycle
- Underestimating downtime - Class B office can take 18-24 months to re-lease
- Missing the cost-of-capital on the TI fund-up (institutional CapEx reserves cost real money)
- Assuming the in-place tenant will renew at face rent when the market rent is materially lower
Educational reference only. Not investment, tax, legal, or real-estate advice. Confirm market-specific cap rates, lender terms, and tax overlay with your own advisors before acting.