As early as the summer of 2020, Hughes Marino shouted from the rooftops that a commercial office correction was in the works that would be worse than any downturn since the early 1990s commercial real estate crash. Meanwhile, the full-service brokerage firms who represent landlords—and purport to represent tenants—were promoting a rush back to the office that would create the Roaring ‘20s of office leasing with “Covid discounts” that would be short lived, and companies needing MORE office space for social distancing of employees that would ultimately all return. While we knew that these predictions were laughable, they are rooted in brokerage firms’ core business of doing the landlords’ bidding, and doing everything to hold the line on the strong pre-Covid office markets in attempt to price-support building owners and investors on the way down. But the facts are now clear to all, and down it goes…
Availability Rates Continue to Clip Up
The chart below shows a comparison of office availability rates in the major U.S. markets over the last two years.
In many metro markets, availability clipped up 2%-4% and 5%-6% in Seattle, Boston, Austin and San Francisco, over this two-year period. These increases demonstrate tenants shedding space due to the ongoing effects of remote and hybrid working, and getting smaller when their leases expire. Being tenant advisors who walk through businesses every day as we help tenants assess their future requirements, it’s clear that much of Corporate America is still sitting on more office space than is needed. Over the next 3-4 years, as the balance of U.S. 5-10 year leases that were signed pre-Covid expire, this uptick in availability will continue.
The good news for Houston, Dallas and Atlanta is that availability rates have flattened, but yet these markets find themselves now in distress with availability at 26%, 24% and 21% respectively. New York would appear to have flattened at 18%, but surveys and reports indicate that only 10% of employees are back full time, and less than 60% are in the office on an average day. With most major pre-Covid leases in New York City being 10+ years in term, there is going to be some spiking in New York availability rates from 2027-2029 as companies rationalize their footprints upon lease expiration based on the new normal occupancy levels.
More Options for Tenants Than Ever
Our industry is really good at telling stories with percentages, but not so good at presenting real numbers that business owners and executives can relate to. Your leverage as a tenant comes down to how many choices you have at a given moment in time…and there are more options than ever for tenants of every size, in virtually every U.S. market. Whether you need 2,000 SF or 102,000 SF, the sheer volume of options is almost impossible to digest.
For example, in San Francisco, an office tenant from 100,000-150,000 SF has 46 properties that can accommodate the requirement. If that tenant needs 40,000-60,000 SF, 140 buildings can accommodate the requirement. If that tenant needs a smaller suite from 2,000-4,000 SF, there are 932 spaces available today in that size range.
In Boston, an office tenant from 100,000-150,000 SF has 21 properties that can accommodate the requirement. If that tenant needs 40,000-60,000 SF, 65 buildings can accommodate the requirement. If that tenant needs a smaller suite from 2,000-4,000 SF, there are 572 spaces available today in that size range.
We can rinse and repeat for any major market in the U.S. with the same magnitude of results—tenants today, of any size, are king!
How it Ends
It ends badly for building owners, as debt is coming due in the next few years on thousands of U.S. office buildings, and hundreds of prominent office buildings around the U.S. have already been quietly foreclosed upon. Foreclosure sales are selling at 80%-90% off pre-Covid value—or even at land value—and arm’s length sales are occurring at 50%-70% off pre-Covid pricing, with a handful of outliers. As the new owners of these distressed office buildings have the ability to transact at lower rents, there will be continued downward pressure on rents, and even more damage will be done to the market.
Ultimately, a handful of office buildings with the right structural and floor plate configuration will be converted to residential, but many times more than that will be torn down…dismantled…and the underlying land repurposed to address the massive residential real estate shortages with new mid to high-rise apartments and condos built in their place.
How Corporate Tenants Can Be Winners in This Market
Tenants today can get better space with more amenities, at less cost, with more flexibilities than we have seen in over two decades. The biggest challenge for tenants is making sense of all of the options, and understanding not where the market was, but what options can now be leveraged to their benefit. Tenants more than ever need a strong, truth-telling tenant-only advisor, whose company has no actual or potential landlord representation conflicts of interest, that is willing to negotiate with a vision to the future, versus delivering some mediocre long-term lease or renewal that is a vestige from the past.
Marketing statistics provided by CoStar.
