As all businesses have experienced first-hand, the past two years have been a rollercoaster for companies across the country and around the world, maneuvering between new COVID variants and hybrid work strategies, all while trying to keep their doors open and business afloat. The 2021 year played out to be one of sorting it out, and as we head into 2022, tenants have a lot to consider in terms of their real estate. Here are five of our top tips for office tenants navigating the commercial real estate landscape amidst the impacts of COVID.
- Start planning now if your lease expires in 2022.
It might be obvious, but you need to take control of the game clock. If you don’t leave adequate time to implement a move, you won’t have the leverage to negotiate a great renewal, and you will miss out on all the relocation choices to resize and save money.
- Patience rewards those who wait.
If your lease expires in 2023 or 2024, most national markets are in a slow drift to the bottom, so don’t be too early to start the process or lock in. Many landlords would love for a larger or credit tenant with a lease expiring in 2023 or 2024 to lock in now, as it’s likely that most US markets will be worse for owners in 2023-2025 (there are notable exceptions in every US market). Your best renewal is always negotiated at the same time as you are considering your relocation alternatives, as that is when your leverage is at its peak.
- Don’t ignore subleases.
Most landlord listing brokers, that also maneuver to work with tenants, won’t show subleases as they are focused on serving their landlords and doing 5-10 year leases. Such landlord brokers trying to represent tenants often dismiss subleases outright as they position that they have too little term, don’t offer any tenant improvements, or have perceived sublessor default risk. You might have to make some compromises in your ideal configuration given that subleases are offered as-is. However, your future might be uncertain right now, so locking in your 5-10 year perfect space might not be strategically feasible or financially prudent. Most sublessors are companies in good financial standing that don’t need the space due to the impact of remote and hybrid working on their own space requirements—sublessor default risk is generally overstated. For tenants looking for value, who don’t have furniture or want to go through the expense of moving what they have, or those seeking a shorter more flexible term, the sublease market has the best offerings in town.
- Don’t believe the asking rents.
Landlords and their promoting listing brokers have generally not lowered asking rents during COVID. While all national markets today are worse than pre-COVID, commercial real estate is an unregulated industry. Not only do landlords cooperate and share strategies of mutual interest, be assured that the big brokerage firms are the grease in the landlord machine, and help with keeping all of the landlords in lockstep. With the coaching of their brokers, landlords are holding the line on pricing and don’t want any other owner to break ranks. Every national office market has dramatically increased availability as compared to pre-COVID, and with a record amount of sublease space on the market priced 20%-40% below landlords’ expectations, how could the market be the same as two years ago? It’s not, but we must do the work of going to market to pressure test what the market really is—that is how you get to a landlord’s bottom line.
- Don’t be tricked into leases that are too long.
In some large metro markets, there is a history of tenants signing leases of 7-10 years in length. That used to be common pre-COVID when the market was tighter, and tenants often needed large tenant improvement packages to build out their new space. But with national markets trending down, and a flood of good second-generation space on the market, you generally can find alternatives where you can sign a 3-5 year lease. While most markets are trending down and years away from any recovery, a shorter term is not only a smaller liability, but it also provides more flexibility and risk reduction.