By John Jarvis

Robust and ethical price discovery requires leadership
and fortitude. Let’s get to work.

Make no mistake, when it comes to office buildings and office leasing in 2024, everything has changed, and it isn’t good news for most building owners. Strike one is flagging demand, as many or most companies are figuring out that they don’t need at least 20-30% of their current office footprint. Strike two is the surging office vacancy and availability, of course exacerbated by strike one. You don’t need an economics degree to figure out what happens when increasing supply runs into decreasing demand. That’s right, falling prices, as in office rents. And strike three is the higher interest rate environment the building owners now face as they stare down upcoming loan maturities.

My partner David Marino wrote this hard-hitting article calling attention to the game of “hold-the-line” that office landlords and their listing firms are playing by not lowering their asking rental rates in spite of the new market realities. I refer to this as the “pray and pretend” strategy, whereby these office building owners pretend it all isn’t happening and pray that their existing tenants renew their leases without discovering how brutal things really are. I can say with confidence that never in my 37-year career as a corporate real estate advisor has the role of the tenant representative been more important than right now, to drive a robust process of price discovery in the uncharted terrain of the current down trending market cycle. I know this can come across as self-serving, so let me say this—I am not advocating for our company alone, but rather for the entire tenant-focused brokerage community. We’ve got some serious work to do, let’s make sure we have a seat at the table.

Yes, there are counterexamples and pockets of strength in the office market. Small-town America may not feel the same effects as the large, urban office markets. And the flight to quality phenomenon is real, where some of the very best buildings in the very best locations appear to be somewhat immune to the downward pressure on rates, for now. But that premium pricing is unsustainable, as the gap widens between the very best spaces and the next-best spaces, a gap I refer to as the Quality Premium Spread or QPS, and as this QPS grows it will create economic osmosis driving downward pressure on rents for the nicest spaces as well.

Whenever I talk about the conflict of interest inherent in dual agency brokerage, I am always quick to point out that it isn’t the people that are bad, it is the model that is flawed. I have many good friends working at full-service brokerage companies, these are top-shelf real estate professionals and generally fantastic human beings. And yet, unfortunately, I don’t think they are in the best position to occupy that critical tenant-side seat at the negotiating table in the current office market turmoil.

So to all the tenant-side corporate real estate pros I say, let’s get to work. Let’s do the hard work that will be required to peg the new rent levels through a process of price discovery. The next few years are going to see a lot of subleases, lease renegotiations and, unfortunately, foreclosures. When we represent a quality tenant looking to lease space, we don’t need to pound our chest, but we do need to pound the pavement to find the opportunities with building owners who can transact, and in this robust and ethical process we can scout out the new, true price level. The good news in all of this? 2024 is a great time to be a tenant. Let’s get to work.