Written by Patrick Sentner, SIOR. Reprinted with permission from WMRE Magazine.
After what seemed like an eternity, the faucets have been turned on and office real estate projects have begun to flow, for some. This statement may seem a bit over the top, but considering deals were reduced to a trickle at the peak of the pandemic, the recent upticks in activity are a significant, and welcome, change. Organizations that had put the brakes on any moves in 2020 are now beginning to tour properties and execute leases. In many cases, companies are taking advantage of vacant offices to reimagine how their space should be designed post-COVID with the goal of creating a workplace that entices employees to return to work. This new environment often includes comfortable, collaborative areas where employees can gather together for brainstorming sessions and provide opportunities to become more productive than working from home can offer. Ultimately, this trend will result in a vastly improved office environment that employees will be excited to come to every day.
Improvements aren’t simply about quality, but also quantity. Organizations are analyzing the amount of office space they will need going forward, which has resulted in a large increase in the amount of sublease space hitting the market. Rather than reduce their footprint in response to a recession, tenants have decided to support a portion of the workforce that can permanently work from home. However, unlike in the past, today’s sublease terms are quite flexible and are now marketed to long-term prospects as well as the traditional short-term prospects. They offer below-market rental rates, immediate occupancy, free rent, and tenant improvement dollars. As we emerge from the pandemic, subleases are truly competitive to landlords. To compete, many Landlords in B+ and A- properties are becoming very aggressive, offering more and more free rent and lower rates. But interestingly, as tenants look for quality above all else, the true Class A buildings, outfitted with desirable amenities, have been able to hold their rental prices.
According to Jeremy Kronman, Vice Chairman at CBRE, “one bright spot in office leasing the last 90 days has been the true trophy class office buildings. We are continuing to see a flight to quality where Class A space users are demanding the HVAC upgrades, touchless features, and amenities that the trophy buildings adapted during the pandemic, if they did not already have them in place, and where they can more easily coax their employees back to the office. A number of recently executed transactions have emerged where the employer/tenant wants to use this phase-in time as an opportunity to upgrade their employee’s working environment. At the top level of office space, the face rental rates have not been truly impacted.”
It is more important than ever for companies to have access to the most up-to-date market information about any region they reside. Society of Industrial and Office REALTORS® (SIOR) member brokers, located in 48 chapters around the world, are the local experts that have this information. Tenants need to know which landlords are willing to be competitive, and at the same time, landlords need to know what tenants are currently seeking in terms of timing, pricing, or sublease competition. Having access to brokers with recent market comparables will help all parties understand why rates in certain markets are skyrocketing, while other markets are seeing more tenant incentives than have ever been available. The office market is improving weekly and it is vital that organizations have market experts, such as SIORs, on their team to get started on the right path for the future.