The office market across the U.S. continues to adjust and adapt to an environment in which workers bring a new perspective about their ideal work setting, and companies are adjusting to new remote work practices post-pandemic. The companies that win the battle for talent in 2024 are likely the ones that pay close attention to creating workplaces that appeal to workers by focusing on finding the right space in the right location. More frequently, that involves space that is not dated or functionally obsolete. In short, buildings that deliver modern amenities, functionality, and efficiency.
Insights from SIOR leasing experts provide advice every tenant needs to secure space or the right size and maximize their footprints in the coming year. That encompasses negotiating the best deal at the right building in the right location, taking the best approach to reduce the amount of space leased, as well as a myriad of site selection options.
Mike Maroon, SIOR, an office and industrial broker with The Acclaim Group in Cranford, N.J., shares that C-suite user groups are focused on finding the best path and developing a strategy that best suits the needs for their companies’ real estate today.
“The interesting trend going into 2024 is that the drive for workplace flexibility is definitely trending downward this year,” says Maroon. “It is not nearly as prioritized as it was during and immediately after the pandemic.” Currently, attracting the best talent is top of mind for the corporate world, along with retention and creating the best environment to make the employee experience better. Maroon, who is also SIOR’s Tenant Rep and Corporate Services Group Vice Chair, adds that executives are trying to realign their real estate strategy to support their business plan and business goals rather than just simple real estate. It's a much bigger picture view now.
While most companies did respond with flexible remote work practices to navigate through the “pandemic emergency,” Maroon states that phase has passed. “Companies have adjusted, and they are transitioning on a path back to a new normalcy.” What that looks like varies among companies, whether that be five days in the office for the whole team, or in the office Tuesday through Thursday and remote Monday and Friday.
“There is a new type of work environment and practice that has emerged that leans more towards individual flexibility, where employees can be away from the office to take their child to a doctor’s appointment or address the need of a parent they care for,” adds Maroon. He notes it was a practice his company realized was important to adopt even before the pandemic. “That was always kind of the way we were headed in this industry. I view it as more evolution.”
Michael Feuerman, SIOR, an office and industrial tenant representative broker, managing director in Palm Beach, Fla. for Berger Commercial Realty, and SIOR’s Tenant Rep and Corporate Services Group Chair, agrees that the market is different today. “The post-pandemic work-from-home trend really took hold and changed the work environment. The office market has not yet fully come back. Based on Kastle.com weekly statistics, the major office markets across the country are back to 50% to 60% occupancy.”
Feuerman notes that as corporate users rework employee schedules, it will be clear where major utilization or underutilization is occurring. Companies also typically are not reconfiguring the space for the short term. In general, companies continue to use the space as configured pre-pandemic, then right-size and change their floor plans upon renewal or relocation.
The advice Maroon has for tenants seeking to secure space or right size and maximize their footprints in 2024 is to carefully consider which building and landlord is selected. “There's a host of debt issues out there and many landlords haven't reinvested in properties that might appear on the surface to be a good deal. We're also advising to conduct careful due diligence on those landlords that they're considering taking space from.”
It is also wise, notes Maroon, not to be so micro focused or short the space search list based on what the rental rates are or what the annual cost appears to be. For example, if a company gets the metrics right and gets the realignment rate to support corporate goals, a dollar or two of rent one way or another is going to be dwarfed by the quantum leap achieved in terms of retention and attraction of talent considerations. “The cost differential and better collaboration or better innovation at your company because your real estate strategy is correct will blow away by tenfold any dollar to difference in rent,” says Maroon. So, get that right in the first place, and the rest will take care of itself.”
The best advice Feuerman offers is first determining what the space is being used for. For example, a stable law firm with ten lawyers that are all senior status, not expanding, and doesn’t need associates, may best be served by finding the right space and executing a long-term lease. “Firms that are growing or recruiting may need to find a different kind of space that is more flexible and provides expansion rights and growth capacity,” he states.
If the space will serve as a headquarters location or a higher-profile setting is required to help recruit top talent or impress clients, occupying a Class A office space is likely at the top of a space search. Those buildings are usually highly amenitized, and in today’s market, have tended to perform best. “Class A trophy office buildings in CBDs are attracting the best tenants at the highest rents and achieving higher occupancies, points out Feuerman. Companies seeking to pull employees back into the office may very well need to be located in a trophy office building. Since they tend to be newer, they often offer attractive amenities in the building and surrounding submarkets.
For tenants that don’t need all the bells and whistles found in a Class A building, they may be able to locate a building that is not in high demand, that fits its needs and is at a more reasonable price. Determining which space fits a tenants’ needs best starts with knowing how many employees are going to be coming to the office. Knowing which employees require their own dedicated office, if a workstation is suitable, or if a shared or hotel space is sufficient will drive the space decision.
Buildings may look great on the surface, but underneath that surface there could be issues lurking, including a lack of preventative maintenance. The issues stem from the fact that landlords are facing tremendous debt maturity issues. In 2023, there wasn't much relief in terms of financing options, as lenders turned off the capital flow due to rising interest rates. It is also wise to consider the overall community of an office building and what other tenants occupy the space. If there’s a significant lease rollover on the horizon it could impact the tenant mix and change the entire experience of a building. The arrival of a new tenant could change the appeal of the building for employees, while the departure of a tenant might leave the space vacant, creating a long-term void that could dampen the work environment for remaining tenants.
On the preventative maintenance side, it is important to know if a landlord has been keeping up with reinvesting in the infrastructure of a building. “On a nice sunny day, you might not notice a big difference in HVAC quality,” says Maroon. On the other hand, “if there's a more severe weather day with very, very cold weather, that experience could be vastly different. It is easy to get a sense walking through a building if the property management team is staying on top of things such as keeping things as tidy as they should be or making sure the restrooms are as clean as they should be.”
One effective method Maroon suggests to gain a well-rounded perspective is to conduct blind surveys with existing tenants. Questions can pertain to how well the property management takes care of requests, how responsive the landlord is, do they keep the building clean, or how long does it take to clear snow or debris and ice from parking areas during inclement weather. “[A survey] always provides a good sense and better picture of how well a building is being taken care of beyond what is observed or learned from site tours or conversations, which leads to tenants being able to make better, informed leasing decisions,” Maroon concludes.
Negotiating the best deal in the right location requires companies to conduct careful due diligence about the tenants in a building, as well as consider the performance other properties in a landlord’s portfolio may have on the site under consideration. Such due diligence can provide insights on how to strike the best lease with a landlord. That could include seeing what the landlord has done on similar deals and with credit tenants at other properties. “If a tenant does that homework in advance, it allows us to leverage up their ability to strike a better deal,” explains Maroon. Many times, he notes, tenants get caught up in a micro-focused view of rental rates or focus on securing free rent. “The best strategy is to approach deals with a multiple-pronged strategy, encompassing free rent, a vibrant amenity package, and other factors,” he adds. “When tenants only focus on one aspect, they can overlook what might be a better deal or not get a deal done at all.”
Feuerman notes the best deals are negotiated when companies shop around. There is a wide range of demand across submarkets, so understanding where the most activity is occurring and what the competitive landscape is will inform decisions. Knowing which landlords may be struggling, either at a particular building or across their portfolio, can uncover those willing to strike a better deal. Experienced tenant representatives are expected to know the market, be aware of who’s active, where deals are being executed, and the rental terms or concessions a tenant can reasonably expect such as free rent, tenant improvement allowances, expansion or contractions rights, or the ability to lock in renewal rates.
If a tenant needs to reduce its leased footprint in 2024, there are several approaches Maroon believes work best to achieve that goal. The process starts with determining if a tenant is set on remaining in that building or will consider other options. “If a tenant is open to find a better solution and considers relocating in today’s competitive office leasing market,” he goes on, “they may be able to leverage one building against another or one landlord against another.”. Whereas, if a tenant plans to stay where they are and looks to reduce space, it is really important to have conversations internally to determine what is not needed anymore, such as a giant conference room or two large offices and realign the space with a design and functionality that works for current and future needs.
The leasing process today is more complicated than it may look on the surface. Feuerman notes, “It’s not just square footage and face rental rate. There are a lot of things in the lease that can help you or hurt you in the long term or even the short term, and they can be problematic if you don’t pay attention to them.” However, if negotiated properly, Feuerman explains, these clauses can protect a tenant and help achieve the company’s goals. It goes beyond just having a lawyer, but also a broker who understands the complexities, and negotiates on behalf of a tenant as an advocate.
For instance, business terms can be negotiated up front to account for future eventualities. That may include termination options before a lease term is completed encompassing when a tenant can give notice. “Tenants must be very specific about terms to provide maximum flexibility later,” asserts Feuerman. “Defaulting and walking away is not the best business decision because the liability remains. It is much better to find ways to work out a plan with the landlord before signing the lease, even if you don’t anticipate having to it. Working it out after lease execution takes all of the negotiating power out of the tenant’s hands. Options are really limited unless a tenant plans ahead.”
That may involve extending a lease out, giving a landlord more term to compensate for a downsizing, providing some free rent to get a tenant through a recessionary event, or a pre-negotiated early termination fee for an early exit. Landlords tend to be more willing to consider the types of workarounds that keep a tenant in a building in an environment like exists today, where vacancy rates are high. It allows them to lock in a tenant, especially if it is a good one, for a longer term and that satisfies both sides.
Today, the space may have different needs from when a company started 5 or 10 years ago. That space may have been built out for needs then and it could be completely misaligned, although still comfortable with business today.
According to Feuerman, the current leasing environment is causing firms to becoming even more cost-conscious, and that is showing up in the way tenants are shrinking their office footprints. They have reduced the amount of space from roughly 250 rentable square feet per employee 25 years ago to approximately 200 square feet per person, with some even going as low as 115 square feet per person today. Companies are reducing the size of workstations, shrinking the size of conference rooms, and taking other space reduction measures. The pandemic worked to accelerate that trend and it requires a well-conceived space assessment to determine what is right for each company. Tenants can significantly reduce their footprint by finding a building that has amenities that everybody can use.
Savvy tenants conduct side-by-side comparisons of every building and every lease offer. These detailed analyses help provide a clearer picture of what they are paying on a rentable square footage basis as well as what they're paying per usable square foot in each building. In many cases, it could be wildly different if it involves a less efficient building.
“There is a misconception amongst users that all office space should be free because there's a perception that massive vacancies exist and tenants should get a phenomenal deal,” states Maroon, who observes that the market today is a tale of two diverse situations. “The office sector is facing challenges but not every market or office segment is in distress.”
The other bucket, where landlords put minimal effort or investment into updating a building’s infrastructure and amenities, resulted in a ‘kick the can down the road’ approach. Many landlords believe they will make those investments if and when they secure a tenant. Yet, that strategy tends to result in higher vacancies, and those properties will likely be prime candidates for going back to the bank. Proactive landlords are capturing more deals because tenants gravitate to the better-quality spaces, that offer great infrastructure, the best amenities, and are well located.
Maroon describes the overall leasing environment today as “very opportunistic for savvy tenants.” That is because tenants must be highly selective in which landlords and buildings they get involved with. They must also be selective about being located near available pools of labor today, while looking down the road to see where future talent will come from.”
Maroon suggests considering several key site selection factors, starting with examining if the existing space still works from an employee migration perspective. If in the decade a company has been in a space where 20% of employees have left the company, maybe another site would serve the new employee base better. Another important aspect to consider, Maroon goes on, is where competitors are located and if they are offering better-paying jobs. Conducting that type of due diligence early on will provide the information required to expedite the search process and is a healthy exercise that tends to yield better site selection decisions.
The buildings that are continuing to win the battle for tenants in 2024 are those that are suited to tenants’ needs and are well located. Leasing experts predict that buildings that offer modern amenities that are in demand, provide maximum functionality, and are the most efficient will prove to be the ones that achieve higher occupancies as everyone adjusts to the new work environment that’s emerging.
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Michael Feuerman, SIOR is an office and industrial tenant representative working with clients throughout the United States, with a focus on South Florida. His areas of specialization include site selection, leasing, subleasing, and owner-user purchase and sales. Michael is a Senior Vice President with Berger Commercial Realty, a South Florida regional independent brokerage and management firm. He serves as the Managing Director of Berger’s Palm Beach County office and runs the firm’s prospecting and broker-coaching program.
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Mike Maroon, SIOR is an office and industrial specialist with over thirty years of experience in the sector. He focuses on helping companies optimize performance by aligning their real estate with their strategic goals. He has been working as a Managing Partner at The Acclaim Group for 26 years and previously, Michael served as a board member in SIOR's Board of Directors. |