Today’s office market conditions present interesting opportunities for tenants in their current and future leases.
In this video, CBIZ Gibraltar’s Senior Vice President Eric Galanti discusses the current state of the market with updates that tenants can leverage for economic advantage.
In general, the vast majority of markets across the US remain very soft and tenant favorable. Vacancy has increased and we expect this trend to continue this year and into 2024, and even 2025, as landlords get space back from tenants who have been in long-term lease commitments before the pandemic.
Tenants have not yet experienced dramatic drops in rental rates, and it is not anticipated due to landlords trying to maintain the highest possible valuation and adhere to lender covenants and restrictions. Instead, landlords continue to entice tenants with lease concessions and must remain flexible in the ways they structure deals and offer incentives, such as free rent and tenant improvement allowances to build out the space.
At the same time, there has been an increase of landlords defaulting on their loans, and buildings entering into foreclosure. For the most part, these building remain operational — and while the ability to support tenant improvements become a case-by-case basis, many will still be able to facilitate new deals at a minimum.
Chicago and Washington, DC are two markets that have led the US in office-to-residential conversations. This typically happens in lower class buildings, such as Class C and B- buildings. As such, from a quality standpoint, we are beginning to see the bottom of market drop out with these conversations.
Traditionally, Class A and B assets remain the most desirable given their amenities and quality tenant rosters, both nationally and internationally.
As companies have reduced their footprint, many have considered more expensive buildings that offer more amenities like fitness centers, tenant lounges, food halls and golf simulators. As a result, the flight to quality is an increasing trend, but uncertainty from an economic standpoint continues to impact business decisions around space needs.
Leasing activity has been increasingly dominated by smaller space commitments since the height of the pandemic. Approximately 60% of the leases signed in 2022 were less than 15,000 Sq Ft, compared to 49% of leases signed prior to the pandemic.
On the other side of the spectrum, only 10% of the leases signed in 2022 were for 100,000 Sq Ft or more, compared to 19% in the 3-year period prior to the pandemic.
Of course, during this time, landlords’ willingness to consider short-term leases was minimal. Today, however, there has been great reluctancy among tenants to sign long-terms deals as companies consider the needs of their current and future office footprint. Therefore, landlords are still amenable to short-term deal with more favorable conditions to maintain occupancy.
Looking forward, we expect the tenant-friendly market to continue in 2023 as companies adapt their office spaces to their post-pandemic needs. Our team at CBIZ Gibraltar is always monitoring conditions across office markets – and as trends evolve in our current environment, we think that 2023 will be a milestone year for office space users following the unconventional trends witnessed during the height of the pandemic.
Overall, there should be some stabilization in the market, as tenants get their arms around their space needs and hybrid policy and are able to make long term decision.
All this being said, it continues to be a great time to be a tenant, and there are tremendous opportunities for healthy tenants willing to make long-term decisions to take advantage of the market.
As the leading provider of integrated real estate services with a 100% commitment to advocating the interests and needs of tenants, CBIZ Gibraltar understands that no two companies are alike and works to deliver the best possible solutions for our clients. Together, we uncover the potential of your work environment, maximize human capital and map the path to critical business success.