Effective Rent
The average rent a landlord actually collects over a lease term after accounting for free rent, escalations, and other concessions.
Definition
Effective rent converts a lease's face rate and any concessions into a single comparable figure, usually expressed as an average dollar per square foot per year over the full term. It accounts for free rent periods and escalations, and sometimes factors in tenant improvement allowances when those are amortized into the comparison. Effective rent matters because two leases quoting the same face rate can carry very different economics once concessions are included. Brokers and landlords use it to compare competing deals on the same basis and to track true market pricing, since face rates can hold steady in a soft market while landlords quietly increase abatement or TI to close deals. In small bay industrial, where concessions are usually limited to a month or two of free rent rather than heavy TI packages, the gap between face rent and effective rent is typically smaller than in office leasing.
Formula
Effective Rent = (Total Base Rent Paid Over Lease Term / Total Months in Term) x 12, per SFExample
A tenant signs a 3-year lease at a $15/SF face rate with one month of free rent at signing. Total rent paid over the term equals $15 x 35 months of occupied rent, spread across all 36 months: $525 / 36 = $14.58/SF effective rent, about 2.8% below the face rate.