The Commercial Office Market and the Markup for Full Service Leases

ARES 2011 Manuscript Prize Winner - Office Buildings/Office Parks

Because landlords assume all of the operating expense risk, rents for gross leases exceed those for triple-net leases. The markup for gross leases varies between properties and across markets. In this study, we develop a theory explaining the spread between gross and triple-net rents for office space across urban markets. A multi-stage model is developed with the first stage estimating triple-net rent through its proposed determinants. Stage 2 uses the estimated coefficients from the triple-net rent equations to generate expected rents for gross leases with which we estimate the gross rent markup for each property.