Signs are emerging that companies are feeling more confident about their office-leasing decisions, prompting a bump in touring and leasing activity in several U.S. markets.
In New York City, there was about 18.6 million square feet of office-tenant activity on average in 2018 and 2019, according to data from CBRE Group Inc. (NYSE: CBRE). At the lowest point of the Covid-19 pandemic, that plummeted to 3.8 million square feet.
Right now, the firm is tracking 26 million square feet of office requirements in New York, said Paul Myers, vice chairman at CBRE who represents tenants in commercial real estate lease negotiations in New York City.
Since the pandemic, most of the office-leasing activity nationally has been driven by professional-services firms and companies in industries like law and finance — which returned to the office on a more regular basis, and sooner, than other industries. Technology, which had been the biggest driver of office-leasing activity right before the pandemic, has as an industry scaled back its leasing activity significantly since 2020 and has embraced remote work.
But in a metro like New York, office tenants in industries like tech, retail, media and entertainment — which had all been largely absent from the office market in the pandemic’s aftermath — are back in a big way, Myers said.
The uptick in leasing demand may be coinciding with a few broader factors, including a more-certain economy and a bigger push by companies for their employees to be back in the office.
Amazon.com Inc. (Nasdaq: AMZN) made a big splash last month when CEO Andy Jassy said all employees would be required to be in the office five days a week starting in January. The company, however, is not alone in wanting to get more people back to the office more regularly.
“We’re hearing from more and more users of office space … that they’re a little fed up with the uncertainty,” said Michael Lirtzman, head of U.S. office leasing at Colliers International Inc. (Nasdaq: CIGI). “Not only is it an issue of office space, but they can’t plan investment, nor can they plan rent-expense projections, until they have certainty in terms of what they need in terms of their space.”
Commercial real estate tech company VTS Inc., which tracks office leasing demand in several major U.S. markets, this summer said office demand hit bottom in late 2022 or early 2023. It made that determination in July of this year based on what it called a substantial period of stability and growth within the office market, including 12 consecutive months of year-over-year growth in tenant demand, and supporting economic factors.
The firm’s VTS Office Demand Index, or VODI, saw a 17% increase at the end of the second quarter from the same quarter a year earlier and a 34% increase from when it bottomed out in December 2022 and January 2023.
Themes that have been prominent in the U.S. office market since the pandemic — companies taking less square footage and moving into trophy office towers — are still happening, Lirtzman and others say.
The uptick in leasing activity also will not erase the significant headwinds facing the U.S. office market, which continues to contend with record-high vacancy that’s expected to continue to climb and a mountain of debt backed by office towers coming due in the coming years.
But companies today overall have more confidence in their leasing decisions, which may include signing a lease with a longer term compared to the one- and two-year extensions that were hallmarks a couple of years ago.
It’s created a more-positive third quarter for some U.S. markets than what’s been seen since the pandemic. Among markets tracked by Colliers, Manhattan and Dallas had significant positive absorption, at 3.5 million square feet and a little more than 1 million square feet, respectively.
While the national market isn’t seeing the levels of absorption that were common in 2018 and 2019, Marianne Skorupski, director of national office research at Colliers, said certain markets, like some Sun Belt sites, are still proving to be attractive to office users post-pandemic.
Flight-to-quality competition heats up
Space in the most high-profile buildings is filling up fast, prompting a race of sorts to lock down that real estate before it’s gone.
Only 28 million square feet of new office space is expected to deliver in 2024, well below norms, Skorupski said. With hardly any new office construction breaking ground in recent years, that dearth of the newest and most amenitized space could hobble the market in the coming years.
That may not all be bad news, though.
“This is good for keeping the market in check, to allow more organic takeup of the space in existence,” Skorupski said.
Tenants in some places are having to turn to what’s considered Class A-minus or B-plus buildings — space that has largely been ignored and sat vacant since companies began rethinking their office real estate.
That includes newly built speculative towers that broke ground right around the pandemic’s onset that are, perhaps, a block or two off a key transit or transportation corridor or somewhat removed from the best amenities.
“That next tier of buildings is having maybe a renaissance,” Lirtzman said, although he added some tenants are choosing to stay in place to see what options could become available in the coming years.
Companies still struggle to right-size their footprint
Despite companies having a greater sense of confidence about signing a lease, how much square footage is needed remains a tough thing to determine for many occupiers.
It’s been common since the pandemic for office users to negotiate early-term expansion flexibility into their lease agreements, Myers said — something landlords were generally willing to do in a market with little tenant demand. Those types of agreements allowed companies to either take an additional floor at a later time, hold off on building out a floor or even give one back if it wasn’t needed.
Between 2023 and the early part of this year, 45 lease transactions in New York included tenants that took a total of 1.9 million square feet; another 900,000 square feet was added by those groups collectively within a year of signing their leases.
“[It’s] hard to nail down,” Myers said. “People don’t want to make a big mistake on [their] square footage.”
Lirtzman said tenants today are still seeking as much flexibility as they can reasonably get in their leases. Those requests today “are not as extreme” as they were two or three years ago, and companies overall are more firmly committing to space at the outset.
Still, he added, deals are moving more slowly today than they were a year ago as tenants try to get as much flexibility as possible, especially in nailing down what medium- to long-term space needs might look like.
Source: “Office-Leasing demand starts to make a comeback nationallay”
