Many companies are sitting on their hands while figuring out how much office space they will actually need in a hybrid work environment. But commercial real estate brokers say that landlords are willing to make good deals now as the market slowly recovers.
While lease vacancy rates aren’t expected to return to the 30-year average of 15 percent until at least 2026, according to insights from real estate market research firm CBRE, leasing activity is picking up–totaling 45.8 million square feet, up over 26 percent from last year. Additionally, average gross asking rent increased by 1.2 percent to $35.10 per square foot. The improvement in office demand will be greatest in markets hardest hit during the downturn, including parts of Manhattan, Chicago, Seattle, and Dallas.
Though the market is getting more competitive, many companies are still hesitant, not wanting to waste time, effort, and resources on making large changes without more certain projections into when, and how many, employees will return to the office full time, says Julie Whelan, global head of occupier thought leadership at CBRE.
A recent survey by CBRE of 207 office-using companies globally found that more than 70 percent expect a full return to the office to unfold in 2022. Those companies allowing employees to decide will see workers trickling back throughout the year; those requiring a return on a part-time basis can expect a return by July. And those requiring a full-time return are largely already back.
This suggests overall office occupancy will steadily increase, especially for tech and financial services companies with money to spare, says Whelan. You should especially move fast if you’re looking to downsize, she says, since most companies will end up doing so. Remote work has led to a 9 percent reduction in per-employee office use in a baseline scenario, according to insights from CBRE.
Getting a Deal
Companies looking to coax employees back to the office are seeking space with attractive amenities and flexibility, such as free meals, comfortable spaces to socialize and relax, and fitness studios. “The evolution to hybrid work and employee preferences has led to a flight to quality,” says Robert Rivani, president of Black Lion Investment Group, a Los Angeles-based real estate investment firm.
In Los Angeles, for example, Rivani says areas that are purely corporate, with vast, traditional office space, or those in more suburban locations, lost tenants to smaller spaces in more bustling neighborhoods. For example, while the overall office vacancy rate declined across L.A. in the first quarter of 2022, in downtown the vacancy rate rose to 22.4 percent, according to reports from CBRE.
In Miami, however, which experienced a population boom during the pandemic, there was a corresponding surge in demand for downtown office space, and in areas such as Brickell, which touts high-end restaurants, bars, and nightlife. Absorption climbed to an all-time high of 6.8 million square feet in the last quarter of 2021, and overall office vacancy declined to 3 percent, according to CBRE.
“The high end of the market is going to rebound faster and become tighter, so it might not be there when you want it if you wait too long,” says Whelan.
Before you jump ship to a new location, it’s of course worth negotiating with your current landlord to see if they’re willing to budge on rent or offer other incentives. Rivani says he commonly hears of landlords offering shorter lease terms, free rent, and car loans to hang onto tenants. For new leases, some landlords will ask for smaller deposits, one or two months instead of the usual four or six, or insert “Covid pause” clauses, which would not penalize tenants in the case of another surge or shutdown. If a space isn’t move-in ready, you can also negotiate on renovations.
Whelan notes that most business owners have six to 18 months to make a deal before the market tightens, and that, of course, could change if the pandemic experiences another wave. While that may seem like a long time, you’ll likely want to start looking now or budgeting to see if making an office transition is a smart idea now rather than later.
“Landlords have been much more willing to negotiate on things like free rent periods and tenant improvement allowances, and in some cases they’re willing to take a hit,” says Whelan. So if you’re looking, now may be the best time to take the leap.