As the first few months of the coronavirus pandemic dragged on, real estate felt the effects of shutdowns and orders left at home almost immediately. For the office sector, this meant a sharp decline in leasing volumes and leasing, as well as a turning point for the supply and demand spectrum.
Encouraging advances in coronavirus vaccines spiked inventories in early November and, at the end of the tunnel, shed some light on what a possible recovery might look like. But what will office rents look like this year and beyond when cases are at all-time highs during the recent resurgence, winter season here and a lot of uncertainty?
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To find out, we spoke to real estate agents and other commercial real estate experts who were thinking about where we are compared to last year and what to expect in 2021.
Since the outbreak of the COVID-19 pandemic, office rental activity in the US has declined significantly in the US. According to CBRE, statewide office leasing fell 21.5 million square feet in the second quarter alone.
In New York City – one of the largest office markets in the country, spanning more than 500 million square feet – leasing volumes in the central business district fell to all-time lows. In the first nine months of 2020, the office space amounted to around 15 million square meters. For comparison: According to data from Colliers International, 43 million square meters were rented in 2019.
« We are well on the way to achieving a year-over-year decline of more than 50 percent for 2020 as a whole and being the slowest year in Manhattan leasing volume this century, » said Frank Wallach, Senior Managing Director of Research at Colliers said late last year. « This level of decline is not used even in markets with economic fluctuations. »
Not only has lease volume decreased, but contract duration has decreased, renewals have a much larger share of total activity, and the sublease market has hit new highs, with JLL estimating a potential availability of 150 million square feet by 2020, according to an analysis of the third quarter.
New tenant requirements
With market fundamentals shifting dramatically, many tenants – despite being more concerned with health and safety than ever before – sought to take advantage of favorable terms.
« Tenants are more aggressive than ever, » said Ian Anderson, senior director of research at CBRE.
Owners have become increasingly flexible and accommodating, and have made inexpensive and inexpensive improvements to their buildings – such as installing better ventilation systems or incorporating UV light to kill viruses – to attract tenants.
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« For the first six months of the crisis through September, owners held on to hope that it would pass, » said Anderson. « They were pretty persistent and you didn’t see much flexibility in terms of rents. They still felt like they had a lot of influence over tenants. But that has really stalled in the last few months. »
Matt Leon, executive managing director of commercial leasing at Newmark, said he hadn’t seen many landlord concessions in Manhattan. What he has seen in tenants is the ability to upgrade buildings to the point where their employees can return to the office.
« Many buildings have now been modernized, » he said. « I think there is a big picture to reinvent yourself in a better building or to redesign your space in a better environment. »
Leon mentioned discussions with « a number of » tenants to restructure or extend their current leases. He said this could be a « win-win » situation if done right. « Landlords can keep tenants and tenants get expedited concessions, » he added.
In the northern New Jersey office market, NAI Hanson’s realtor Judy Troiano has found landlords are considering shorter rental terms, particularly two- and three-year leases. “I think the real challenge for (landlords) now is not the free rent or the discount, but the short-term leases with construction costs at an all-time high. You are struggling to make the deal. «
Leasing professionals had to adapt quickly in the unpredictable and unprecedented year 2020. Much of the conversation has focused on tenants in the market, as well as flexibility and concessions from owners, but tenants also need to be willing to turn, Troiano said. In the future, flexibility will be crucial in how both landlords and tenants deal with office leasing.
« Ultimately, it’s not rocket science, » said Troiano. « It’s about bringing two people around the table and satisfying the majority of their two needs. Tenants’ needs have simply changed. »
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For Leon, being an office rental agent during the pandemic has been a rewarding experience.
« Now a broker is more of an advisor to clients, » he said. “Everyone will try to talk to you and work out a plan. We are busy, just different from previous cycles. You have to be a little more detailed, there is a little more hand posture. «
Many in the industry are optimistic that the economy will recover and recover in the second half of 2021 after the spread of coronavirus vaccines and potentially stronger legislation on stimuli are rampant. However, should it turn out to be the case, some are expecting a withdrawal from companies who decide to keep their spaces for possible expansion, retention, or a number of reasons, CBRE’s Anderson said.
With uncertainty still being the name of the game, insiders were sure to agree that some variations of working from home will still be in demand.
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« Less space will be rented in the near future, and that will make it difficult for landlords to raise rents and have strong bargaining positions, » said Anderson.
What could cushion some of that pain is the potential for economic recovery over the next year, he added. And as the competition for space intensifies, tenants looking to expand will reduce the negative impact of the work-from-home trend.
« It’s complicated, it’s unfolding, but we know the mood has changed, » concluded Anderson.