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New leasing activity indicates office tenants will return

Two years into the COVID-19 pandemic, the exact course for the future of the office sector remains uncertain. But more and more signs are emerging that many office properties will be fine.

In addition to the ramp-up in office building acquisitions by major investors, where the industry is growing, in addition to the ramp-up in office building acquisitions that often act as bellwethers, office leasing in most major markets in the fourth quarter of 2021, according to Sarah Dreyer, Washington, D.C. has increased significantly. Senior vice president of research and data services with commercial real estate services firm Sevilles. In fact, leasing volumes in key markets in the most recent quarter were up 89 percent compared to the fourth quarter of 2020, with demand for direct leasing coming from a variety of sectors, Dreyer says.

Half of the 20 largest office leases signed in the fourth quarter of 2021 include deals with technology and financial services firms, leasing with Kevin Morgan, Reno, Nev-based president for the Northwest/North Central region and real estate Head of the agency. Services firm Colliers International. For example, Meta Platforms (formerly Facebook) signed the largest new office lease last quarter, covering an area of ​​598,112 square feet. An under construction office tower in Austin, Texas, at Foot VI and Guadalupe. “Despite the increase in remote working, tech firms continue to make major office commitments,” says Morgan.

Dallas-based Jeff says, “Traditional office-leasing tenants—finance, accounting, consulting and law firms—as well as key tech users are displaying a preference for large, direct deals, either in the form of renovations or relocations. ” Eckert, president of a US leasing agency with commercial real estate services firm JLL. Big Tech continues to be the most influential leasing driver of all time nationally, he said, adding that the sector has grown its office square footage to more than 9 million square feet. During the foot epidemic. According to Saviles Dreyer, in addition to Meta, major tech tenants committed to a significant amount of space in 2021 included Amazon, Microsoft, Hulu, HubSpot, Apple, Riot Games and Activision/Blizzard. Meanwhile, the federal government leased a significant amount of space last year, particularly in the Washington, DC area, she adds.

In the fourth quarter, total office lease volume was highest in Manhattan, where tenants signed on at 9.3 million square feet. In foot office deals, according to data from Savills. Meanwhile, San Francisco experienced the biggest increase in leasing activity year-over-year, growing 400 percent to 1.8 million square feet. “It was a positive sign, as San Francisco was the market hardest hit by the impact of the pandemic,” says Foot Dreyer.

According to Colliers Morgan, other major US cities including Boston, Dallas and Los Angeles saw strong office space absorption in the fourth quarter of 2021. However, the markets that are seeing the biggest jump in office demand, as measured by net absorption, are second-tier, tech-friendly cities such as Austin, Nashville, Tenn. and Salt Lake City.

What are tenants looking for?

Office tenants’ desire for high-quality spaces with top-notch amenities was already a trend pre-COVID-19, but it has evolved further as companies seek to attract the best talent and bring workers to office. I want to bring back, according to Morgan.

According to JLL’s Eckerts, tenants who have signed new leases today are displaying a strong preference for newly delivered and under construction product. JLL data shows that 24.7 percent of new leasing activity in recent quarters has occurred in buildings distributed after 2015, despite the fact that they represent just 12.8 percent of total US office inventory.

However, when it comes to expansion or contraction plans for potential tenants, the picture is less clear, according to Dreyer. “There is no one-size-fits-all, some companies are increasing the space to allow for more distance between employees and common areas/collaboration space, and some are taking up less space as the hybrid-work model has been implemented for a long time. are,” she notes.

The potential size of the total footprints of many office tenants will remain unclear until a massive return to the office, agrees Morgan. “Given the current leasing commitments and the time it takes to achieve optimal workplace solutions, it will take several years to fully accomplish all of this,” he says.

According to Morgan, more new office leases are being signed—18 of the 20 largest transactions in the fourth quarter involve new commitments rather than renewals. And “in terms of relocation, there hasn’t been a much more haunting move from city locations to the suburbs than some commentators predicted,” he noted. But new lease commitments are running lower than they were pre-pandemic.

New office lease terms fell dramatically during 2020, according to Eckert, from the normal range of 8.5 to 9.5 years to 6.7 years. But the increasing share of new leases in the 10-plus range signed in 2021 helped bring the average down to 7.8 years. “As tenants seek more flexibility moving forward, lease terms as part of a structure shift in market dynamics are likely to remain slightly lower than they were before the pandemic,” he says.

But the recent rise in long-term leases may be a reflection of firms currently taking advantage of the favorable terms offered by landlords. Rent demand is largely strong in most markets, with Class-A office space rents averaging $52.40 per square foot, according to data from Colliers International. foot in central business districts (CBDs) and $34.20 per square foot. In the ft suburban area. But the gap between the asking and effective rent is widening, notes Morgan. Tenant concessions are also increasing, he says, with landlords offering both a reduction in rent and higher tenant improvement (TI) perks. There’s proof of tis breaking through $100 per square foot. Foot marks the top markets, says Morgan. According to Dreyer, landlords are also allowing increased flexibility in lease terms, including expansion/contraction and termination options.

Due to generous concessions, the net effective rent for Class-A office space in the CBD is now 7.1 percent below pre-pandemic levels, according to Eckert (though this represents an improvement over the 18.9 percent drop recorded in 2020).

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