The lowest asking rent is not always the cheapest lease. Net effective rent folds free rent, improvement dollars and escalations into one number you can compare across offers.
Net effective rent is the average rent a tenant actually pays over a lease after subtracting concessions such as free rent and tenant improvement allowances. Add up all base rent over the term, subtract the free months and the landlord’s improvement contribution, then divide by the number of months and the square footage. It is the fairest way to compare lease offers on Kern County industrial space.
Key takeaways
- Net effective rent spreads free rent, tenant improvements (TI) and escalations across the whole term so you can compare offers with different face rates.
- A higher face rent with concessions can cost less than a lower face rent with none.
- CompStak reported free rent on non-bulk U.S. industrial leases at a cycle-high 4.5% of lease term in Q1 2026, about double the pre-pandemic norm of roughly 2.2% to 2.3%.
- Landlords often prefer free rent to a lower face rate because face rent anchors the building’s value, future escalations and renewal talks.
- Whether free rent covers NNN charges, when it applies and whether it is clawed back on default all vary by lease.
What is net effective rent?
It is what a lease costs per square foot per month once concessions come out and the result is averaged over the term. Face rent, also called asking or contract rent, is the rate written into the lease. National brokerage research describes effective rent as capturing the cost of concessions, which makes it a more complete gauge than the asking rents owners advertise.
Tenants and landlords calculate it a little differently. A tenant subtracts the concessions it receives: free rent, the TI allowance and any other allowances. A landlord also subtracts its own leasing costs, such as brokerage commissions, to see what the deal nets. A quoted net effective rent can follow either version. For how rent is quoted in the first place, see how industrial rent is quoted in California.
What concessions do industrial landlords offer?
Free rent and TI get the attention, but they are not the only levers.
| Concession | What it is | Effect on net effective rent |
|---|---|---|
| Free (abated) rent | Months with no base rent, usually at the start | Lowers it directly; worth more when it comes early |
| TI allowance | Landlord money toward your build-out | Lowers it if you would have paid for the work anyway |
| Landlord work | Repairs or upgrades before delivery, such as roof, HVAC or docks | Avoids costs you would otherwise pay |
| Lower escalations | Smaller annual bumps, such as 3% instead of 4% | Lowers later-year rent; grows with term |
| Early access | Time to install racking or equipment before rent starts | Cuts the time you pay rent without operating |
| Reduced deposit or guarantee | Smaller security deposit or a guarantee that burns off | Frees cash and limits risk rather than lowering rent |
For how TI works in detail, see tenant improvement allowances. On escalations, see fixed bumps vs. CPI.
Not every concession shows up in the math
A smaller security deposit or a limited personal guarantee does not change net effective rent. For a growing business it can matter as much as a month of free rent. See personal guarantees, security deposits and letters of credit.
How common is free rent on industrial leases right now?
More common than before the pandemic. CompStak’s lease data showed free rent on non-bulk industrial leases reaching a cycle-high 4.5% of lease term in Q1 2026. Bulk leases of 200,000 square feet and up reached 4.8%. Pre-pandemic norms were roughly 2.2% to 2.3%. On a five-year lease, 4.5% of term is about 2.7 months. A national brokerage’s 2026 industrial outlook also noted landlords offering longer free-rent periods and larger TI allowances to secure early renewals.
The CompStak figures are national, not specific to Bakersfield or Kern County. Locally, regional brokerage reports put Bakersfield industrial vacancy at 9.55% in Q2 2026. They noted that logistics facilities face higher vacancy and pricing pressure, while specialized and flex properties hold stronger occupancy and rents. In general, expect more room to negotiate concessions on larger distribution space than on small, well-located in-town units. For help reading these reports, see how to read an industrial market report.
Why do landlords offer free rent instead of lowering the rent?
Because face rent sticks. A building’s value is driven by its rent roll, buyers and appraisers look at contract rents, and every future escalation compounds from the starting rate. A month of free rent is a one-time cost. A lower face rate cuts income for the life of the lease and can set a lower comparable for the next deal in the building.
For tenants, free rent at the start often lines up with the cost of moving, racking and ramp-up. The trade-off is that escalations and renewal talks usually build off the higher face rate. A concession-heavy deal can cost more in the later years and at renewal than the headline suggests.
How do you calculate net effective rent?
There are two common methods. The simple method adds up every dollar of base rent over the term, subtracts concessions, and divides by the months in the term and the square footage. The present-value method discounts each month’s rent to today at a chosen rate, often the tenant’s cost of capital, then converts the result back into a level monthly payment. Present value gives more credit to concessions that arrive early, like free rent in the first few months.
- Total the base rent over the term, including escalations.
- Subtract the value of the free rent months.
- Subtract the TI allowance and other cash allowances, if you would spend that money anyway.
- Divide by the number of months, then by the square footage.
What about NNN charges?
Leave NNN charges out of the comparison unless the offers treat them differently. If one landlord abates NNN during the free period and another does not, add that difference to the math.
How is free rent written into an industrial lease?
Five points decide how much the free rent is really worth.
- Base rent only or gross. Most abatements cover base rent only, so you still pay NNN charges. Ask for gross abatement when you have leverage.
- Timing. Free months usually come at the start but can be spread out, for example one month a year. Early is worth more.
- Early access. Separate from free rent, early access lets you install racking, cabling and equipment before the commencement date. Ask for it in writing.
- Clawback. Many leases make abated rent conditional, so if you default the forgiven rent becomes due. Negotiate for the clawback to burn off over time or to apply only to an uncured monetary default.
- Reporting. Free rent can affect how a lease appears in your financial statements. A CPA can advise on the treatment.
Put each of these in the letter of intent, so the lease matches.
How should you compare two lease offers?
- Use the same term and the same discount rate for both.
- Count TI only if you would spend that money anyway.
- Look at year-by-year cash, not just the average, if year one is tight.
- Read the renewal option. A renewal priced off the final year’s rent carries a high face rate forward. See when to start your commercial lease renewal.
- Check early-exit exposure, since unamortized TI and clawed-back free rent may come due.
A tenant rep broker can run these comparisons for you.
Example: two offers on a 50,000 SF Bakersfield distribution building
A tenant is weighing two five-year NNN offers on similar 50,000-square-foot buildings in Bakersfield. Both have 3% annual increases and similar NNN charges, and the tenant needs about $100,000 of lighting and office work either way. Offer A starts at $0.70 per square foot per month with four months of free base rent and a $2.00 per square foot TI allowance. Offer B starts at $0.66 with no concessions. All figures are illustrative.
Offer A saves about $112,600 over the term even though its face rent is about 6% higher. If the tenant did not need the improvements, Offer A’s simple net effective rent would be $0.697, still slightly below Offer B’s $0.701. The present-value method widens A’s lead because the free months come first.
The catch is that by year five, Offer A’s face rent is about $0.79 versus $0.74 for Offer B. That higher number is where the renewal conversation starts.
The table assumes rent is paid monthly in advance, with 3% increases each lease year. The present-value method discounts monthly at 8% a year and values TI on day one.
| Item | Offer A | Offer B |
|---|---|---|
| Starting face rent (per SF per month, NNN) | $0.70 | $0.66 |
| Annual increases | 3% | 3% |
| Scheduled base rent over 60 months | $2,229,837 | $2,102,418 |
| Free rent (4 months) | -$140,000 | $0 |
| TI allowance ($2.00/SF) | -$100,000 | $0 |
| Net cost to tenant | $1,989,837 | $2,102,418 |
| Net effective rent, simple method (per SF per month) | $0.663 | $0.701 |
| Net effective rent, present value at 8% (per SF per month) | $0.644 | $0.698 |
Frequently asked questions
What is the difference between face rent and net effective rent?
Face rent is the rate written in the lease, such as $0.70 per square foot per month. Net effective rent is the average you actually pay after concessions like free rent and TI, spread over the full term. Two leases with the same face rent can have very different net effective rents.
How do you calculate net effective rent?
Total the base rent over the term, then subtract free rent and any allowance you would otherwise have spent yourself. Divide by the months in the term and the square footage. In the example above, $2,229,837 of scheduled rent less $140,000 of free rent and a $100,000 allowance leaves $1,989,837. Over 60 months and 50,000 square feet, that is about $0.663 per square foot per month.
How much free rent is typical on an industrial lease?
It varies by market and building size. CompStak found free rent equal to about 4.5% of term on non-bulk U.S. industrial leases and 4.8% on bulk deals of 200,000 square feet and up in Q1 2026. That is roughly 2.7 to 2.9 months on a five-year lease. Pre-pandemic norms were nearer 2.2% to 2.3%. Those figures are national, not specific to Bakersfield.
Do you pay NNN charges during a free rent period?
Usually yes. Most industrial abatements cover base rent only, so taxes, insurance and common area charges keep running. Some landlords abate NNN charges too, called gross abatement, especially on longer terms or larger deals. Have the letter of intent name exactly which charges are abated.
Can a landlord take back free rent?
Yes, if the lease has a clawback. Many leases make abated rent conditional, so a default makes the forgiven rent due on top of other damages. Tenants can ask to limit the clawback to an uncured monetary default or to let it shrink as rent is paid on schedule.
Should leasing commissions be included in net effective rent?
It depends on whose view you take. A landlord’s version subtracts commissions, TI and free rent because all three are costs of making the deal. A tenant’s version usually leaves commissions out, since the tenant does not pay them directly. For more on who pays, see how commercial real estate commissions work.
If you have two or three offers on the table in Bakersfield or anywhere in Kern County, Kern CRE can run the net effective rent on each so you can see which deal is actually cheaper. Call Kern CRE at 855-KERN-CRE (855-537-6273) or contact us. Get Kern County CRE news monthly: subscribe to the Kern CRE report.
Sources
- 2026 Biannual Industrial Market Overview: Part Three, CompStak, July 9, 2026.
- 2026 Industrial Gateway Market Overview: Rents, Concessions, and the Lease Expiration Wall, CompStak, August 2026.
- U.S. Real Estate Market Outlook 2026: Industrial, CBRE, 2026.
- Office Effective Rents Have Declined (press release), CBRE, December 2023.
- Q2 2026 Bakersfield, CA Industrial Market Report, Lee & Associates, July 2026.
- Net Effective Rent (glossary), Adventures in CRE, undated.
About this article
Kern CRE prepared this article with help from AI research and writing tools. An editor reviewed the draft, checked its facts against the sources linked above and edited it for accuracy and clarity. It is general information, not legal, tax, investment or financial advice; talk with a qualified professional about your situation.