What can we expect for office leasing as the world continues its post-covid recovery?
At the onset of the pandemic, work from home (WFH) became the norm, bringing with it a wave of uncertainty surrounding the future of office real estate. However, as the leading office markets in the U.S. begin to reopen, emerging data and experiences from experts in the field have started to paint an optimistic picture for the office sector. Research by the commercial real estate data firm, VTS, shows stronger-than-expected growth in office demand for March 2021. Although the demand for office space among tenants is trending upwards, several changes ranging from space requirements to effective rates and lease terms have emerged.
Changes in Space Requirements
The WFH model of the pandemic-era working environment has more or less been successful. According to data from the Colliers Implications of COVID-19 on the Workplace survey, more than eight out of ten office workers would like to continue working from home at least one day a week. Several vital factors provide an incentive for employers to accommodate this desire.
Despite overall employment numbers taking a significant hit in the wake of the coronavirus shutdowns, white-collar jobs with annual salaries greater than $60,000 saw an opposite trend that has continued to fuel the war for office employees’ talent. The war for talent continues to incentivize employers to provide desirable work models for recruiting and retaining talent, among which is the flexibility and work-life balance that WFH provides. Additionally, more than half of the respondents in Colliers’ survey reported an increased ability to perform focused work at home.
Despite the realized benefits of WFH, the workplace’s power to cultivate innovation and mentor younger professionals through collaboration has been widely speculated, a hypothesis that was confirmed by data obtained by Colliers in the Implications of COVID-19 on the Workplace survey. These findings have led to many organizations dismissing the notion of an entirely office-free working model. Instead, what has emerged is a hybrid office model. The hybrid office model has led to many companies downsizing – but not completely eliminating – their office presence. According to a VTS analysis conducted for the Wall Street Journal, this accounts for a marginal average space reduction of approximately 10% among companies currently in the market for office space. Landlords within the office sector expected this, which is supported in the results of the 2021 VTS Global Office Landlord Report where 45% of the landlords surveyed reported expecting tenants’ space requirements to decrease this year.
Effective Rates and Lease Terms
In the final quarter of 2020, asking rates among the top 10 office markets across the U.S. fell by an average of 1.2%. The San Francisco office market saw the greatest decline of 9.0%, followed by Manhattan at 3.5%. For top office markets that maintained asking rates, such as Atlanta, Chicago and Washington, DC, increased incentives led to a widening gap between asking and effective rates due to increases in concessions on offer.
The decreased asking and effective rates in the top office markets across the nation are pushing more tenants to act now to secure these attractive rates. And, they’re locking in those discounts and attempting to avoid rent rebounds through longer lease terms. A recent Wall Street Journal article noted a VTS analysis revealing that 45% of tenants currently negotiating with landlords are seeking lease terms of seven years or more. The same article also shows landlords are accommodating these longer lease terms by offering discounts up to 13% below rent rates of the first quarter of 2020 for terms of four years or longer.
Companies with nearing lease expirations are not the only ones getting in on the action either. In the wake of reopening the economy, office tenants are beginning their space searches earlier in an attempt to lock in attractive terms for the long haul.
Despite marginal decreases in space requirements to accommodate hybrid office models, the office sector is poised for a healthy recovery. As with all economic cycles, the current demand for bargain lease terms will effectively contribute to the rebound of the office real estate sector. As more companies enter the market seeking the rent discounts offered in the aftermath of the pandemic, asking and effective rents will begin to return to their pre-pandemic trajectories.
In the immediate future, organizations can leverage the discounted rates and incentives of the current office market. Organizations looking to take advantage of these discounts and incentives should begin their searches early to get in on the action as demand continues to tick upwards.