Effective rent is the average rent a tenant actually pays over the life of a lease, after accounting for free rent periods, concessions, and any landlord costs like a TI allowance that get baked into the deal. It's typically lower than the quoted base rent and is the most accurate number for comparing two competing lease offers.
How effective rent is calculated
The basic method: total all rent payments due over the lease term (accounting for any free months and scheduled escalations), subtract the value of any concessions, then divide by the total number of months and the square footage. The result is a single blended rate that reflects what the deal actually costs on average, rather than the headline year-one number.
This matters most when comparing two buildings with different concession packages — a higher quoted base rent with three months free and a larger TI allowance can produce a lower effective rent than a lower quoted rent with no concessions at all.
Example: comparing two competing offers
| Deal | Quoted base rent | Free rent | TI allowance | Effective rent (5-yr avg) |
|---|---|---|---|---|
| Building A | $9.00 /SF/yr | 2 months | $10 /SF | ~$8.55 /SF/yr |
| Building B | $8.25 /SF/yr | 0 months | $0 /SF | $8.25 /SF/yr |
What to watch for before committing
Term length sensitivity
Concessions matter less the longer the lease term — a few months of free rent has a bigger effect on a 3-year lease than a 10-year one.
Escalations compound the math
Effective rent calculations must include scheduled escalations, not just the starting base rent, to be accurate over a multi-year term.
NNN pass-throughs are separate
Effective rent is usually calculated on base rent alone — still add estimated NNN pass-throughs for the true all-in occupancy cost.
TI allowance value vs cost
A large TI allowance only lowers effective rent if you actually need and use that buildout — don't over-value unused allowance.
Broker-quoted effective rent
Ask brokers to show their effective rent math explicitly rather than taking a quoted number at face value.
Renewal terms excluded
Effective rent calculations for an initial term don't automatically apply to renewal options — check how renewal rent is set separately.
When you need to know this
- Comparing competing lease offers — normalizing different concession packages to a single comparable number
- Negotiating concessions — understanding how free rent or a larger TI allowance actually lowers your cost
- Multi-year budgeting — projecting a realistic average monthly cost rather than relying on a headline quote
- Evaluating broker proposals — verifying that a broker's effective rent calculation reflects the deal accurately
Frequently asked questions
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