Office-leasing volume is down across most industries but weak demand and massive space reductions from the technology sector, in particular, is having an outsized impact in many markets.
A recent study by Savills Inc. found tech leasing fell to a new low in the first quarter of 2023, comprising only 7.8% of demand. Tech made up an average of 21.5% of signed transactions measuring more than 20,000 square feet between Q1 2020 and Q4 2021.
In technology economies Atlanta; Austin, Texas; Denver and Los Angeles, no tech office leases were signed that measured more than 20,000 square feet in Q1.
Given tech has been the top industry to lease office space until recently, the slowdown in deal volume has significant ripple effects in specific office markets.
“I don’t expect that demand to pick back up” right away, said Devon Munos, senior director and head of research platform initiatives at Savills. “In addition to economics changing, these companies are still thinking through their remote work policies moving forward. We do see a lot of major tech employees asking their employees to come back — if that continues, that might give us more insight into these companies’ office space usage, but a lot of things are up in the air.”
Google LLC out of Mountain View, California, set April 4 as its return-to-office date while Seattle-based Amazon.com Inc. (Nasdaq: AMZN) had its first mandated in-person workday in more than three years earlier this month.
Eric Lonergan, executive managing director and co-market leader in Savills’ Seattle office, said many tech companies do want to see people working in the office more regularly but a tight labor market has made issuing mandates difficult.
Lonergan said, in conversations he’s had with venture capitalists, many are adamant about not investing in companies that are remote-first.
“They feel that’s a death knell for innovation,” he continued.
Among the tech markets highlighted by Savills, return-to-office has been spotty. Among 10 major office markets tracked by Kastle Systems International LLC, physical office occupancy has flattened at about 50% usage, with key tech markets like San Francisco and San Jose, California, at 44.9% and 38.5%, respectively, the week of May 3. Another tech-centric market, Austin, was at 63.1% occupancy that same week.
And thanks to an uncertain economy, no industry is poised to grow in such a way that it’ll absorb the oversupply of office space increasingly being found in tech-centric office markets, according to Savills. That’ll contribute to higher vacancy rates and more leverage for tenants that are in the market currently.
A lot of tech companies have put their offices on the sublease market, but the industry tends to ink shorter-term deals than other sectors, Munos said, meaning significant blocks of space will be coming back to landlords in the medium term.
“Landlords, especially for buildings that are becoming more obsolete, will be in a difficult position with their rent rolls,” Munos said.
About $40 billion in outstanding office loans are facing some amount of trouble or distress, Cushman and Wakefield PLC (NYSE: CWK) found earlier this year. Debt maturities totaling more than $130 billion in the office sector are coming due within the next two years, and 20% of all office loans maturing in that time period have a debt structure of three years or less, according to Cushman.
Lonergan said, for companies in the market right now, an additional level of scrutiny is being placed on landlords because of concerns about office-loan maturities and how some towers will perform as tenants exit. It’s not uncommon for landlords to perform extra due diligence on the companies they’re in talks to lease space to, he continued. Now, it’s happening on both sides of the negotiation table.
“We think the newest trend is probably going to be flight to capital,” Munos said, referring to a preference for buildings and landlords that aren’t facing inordinate distress.
Although tech is more broadly expected to see slower leasing volume in the coming quarters, there may be pockets of opportunity, including within certain subsectors of the industry. Artificial intelligence, clean energy and cloud computing are three growth segments of the tech economy worth watching for growth, Munos said.
Source: “How tech-centric office markets are faring with reduced demand for space”
