A lease concession is any benefit a landlord grants to make a lease more attractive without formally cutting the face rent on the lease. When vacancy climbs or a competing property floods the market with new units, concessions let landlords preserve their stated asking rent (which anchors future lease renewals and property valuations) while still giving the tenant real financial relief upfront. The most common concession in residential and multifamily settings is free rent, often one month on a 12-month lease or two months on a 24-month lease. Commercial landlords more frequently offer a tenant improvement allowance (TI allowance), letting the incoming tenant build out the space at the landlord's expense.
Understanding the true cost of a concession matters for underwriting. The effective rent formula translates the concession into a comparable annualized figure: Effective Rent = (Gross Rent over Lease Term - Value of Concessions) / Total Lease Months. For a 12-month lease at $2,000/month where the landlord gives one month free, Effective Rent = ($2,000 x 12 - $2,000) / 12 = $22,000 / 12 = $1,833/month. That $167/month gap is the real cost to the landlord per month of the lease term. Effective rent is the number that matters for NOI modeling and appraisal support, not the face rent printed on the lease.
Concessions are a market-cycle tool, not a permanent pricing signal. In a tight rental market with sub-5% vacancy, landlords rarely need them. When vacancy climbs above 8-10%, concessions often become the default to move units without triggering a formal rent cut that would ripple into comparable rent analysis and cap-rate-based valuations. For property managers advising owner clients, the key discipline is tracking concession packages in a standardized way (dollar value, type, lease term) so the actual effective rent yield is always visible at the portfolio level, and so the concession can be wound down cleanly when market conditions tighten again.
Worked example
A landlord owns a 20-unit multifamily building in a market where three new competing properties just opened nearby. Three units sit vacant and the asking rent is $1,800/month. To fill them without cutting the lease rate, the landlord offers new tenants one month free on a 13-month lease (so tenants pay 12 months but get the keys on month one at no charge). Face rent on the lease: $1,800/month. Concession value: $1,800. Effective rent = ($1,800 x 13 - $1,800) / 13 = ($23,400 - $1,800) / 13 = $21,600 / 13 = $1,661.54/month. The landlord's effective yield is about 7.7% below asking for that lease cycle, but the stated $1,800 rent carries into the renewal conversation 13 months later when the competing supply may have absorbed. Across all three vacant units, the total concession cost is $5,400, compared to the alternative carrying cost of three months at zero revenue ($16,200), making the concession the clearly cheaper path.