Institutional Landlords Are Paying for Face Rates 

Here’s What Commercial Real Estate Tenants Should Know 

Institutional ownership continues to shape Canada’s commercial real estate landscape across both the industrial and office sectors. As vacancy levels rise in several markets, large landlords including Real Estate Investment Trusts (REITs), pension funds, and private equity groups are holding firm on face rents while strategically absorbing costs through more generous incentive programs. 

For these institutions, the approach is deliberate. Asset values are closely tied to rental income, and any reduction in rents can immediately impact both valuations and refinancing metrics. To preserve these metrics, landlords are maintaining their rental rates and using incentives to bridge the gap needed to finalize transactions. 

As our Co-CEO Jacob Cowles explains: 

“The trend is clear: institutional and large-scale landlords are doing everything they can to buy the higher rental rate. They won’t touch the face rent because that number drives asset value and refinancing conversations — so instead, they stack deals with free rent, TI dollars, and other creative incentives. We recently negotiated a 5-year lease on 15,000 sq. ft. where the landlord insisted they couldn’t drop below a certain rent threshold… yet they tabled seven months of free gross rent and a $50,000 allowance just to keep the rate artificially high. 

And while the incentives are nice (I guess), they distort the true state of the market. Those inflated face rates become the datapoints used to define “fair market value,” without reflecting the actual cost required to achieve them. 

In the end, tenants who don’t know better get pulled into deals they believe are at market — when in reality, they’re paying well above it.” 

Incentives are now central to negotiations. Tenants are increasingly securing free rent periods to offset early occupancy costs, tenant improvement (TI) allowances to customize space, and flexible lease terms. The industrial sector is not unique in this regard. Office landlords are following the same pattern, offering substantial TI packages and concessions to retain quality tenants.  

For tenants, this creates a valuable opportunity. While face rents appear firm, the net effective rent (NER) often tells a different story. Including incentives, effective rents can be significantly lower than the advertised rate, offering long-term savings and operational flexibility. 

Four Key Actions for Commercial Real Estate Tenants: 

1. Look beyond the face rent: 
   Always request a detailed breakdown of incentives to calculate the net effective rent. 
2. Understand deal structures: Institutional landlords build TI allowances and broker commissions into their required NER; using a broker does not increase your costs. 
3. Leverage market conditions: Rising vacancies increase competition for quality tenants, creating leverage for stronger terms. 
4. Determine true market rent: Research comparable spaces, vacancy trends, and recent transactions to understand realistic market rates. 

Key Takeaway

Rental rates may appear stable in certain markets, but incentives are doing the heavy lifting. Institutional landlords are protecting asset values, but informed tenants who evaluate net effective costs and market realities can capture meaningful value in today’s evolving landscape. 

Glossary of Terms

Institutional landlords – Large, professionally managed ownership groups, such as pension funds, REITs, or private equity firms, that control significant commercial real estate portfolios.

REITs (Real Estate Investment Trusts) – Investment vehicles that own, operate, or finance income-producing real estate and distribute earnings to investors.

Face rent – The stated rental rate in a lease, before incentives, concessions, or other financial adjustments are applied.

Incentive programs – Financial inducements offered by landlords, such as free rent periods or tenant improvement funding, to secure or retain tenants.

Asset values – The market value of a property or portfolio, typically driven by rental income, lease terms, and prevailing market conditions.

Refinancing metrics – Key financial benchmarks lenders use to assess a property’s performance when evaluating financing or refinancing opportunities.

TI (Tenant Improvement) allowance – Capital provided by a landlord to fund leasehold improvements required to adapt a space for a tenant’s use.

Gross rent – Rent that includes certain operating costs or expenses, as defined in the lease agreement.

Net effective rent (NER) – The average rent paid over the lease term after accounting for incentives, concessions, and landlord contributions.

Concessions – Lease incentives or financial accommodations used to improve deal economics and facilitate transactions.

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