Leasing within the financial-services sector is shifting back toward major cities, although not at the same rate as pre-pandemic days.
A recent analysis by Jones Lang Lasalle Inc. (NYSE: JLL) found gateway markets — Boston, Chicago, Los Angeles, New York, San Francisco, Seattle and Washington, D.C — accounted for 43.6% of all financial-services office leasing activity in 2022 and the first quarter of 2023. That’s up from 33.9% in 2020-2021 and 42.1% in 2019.
Growth markets, meanwhile, which had been growing their share of leasing from financial-services tenants in recent years, accounted for 21.3% of office leases in the financial-services industry in 2022 through Q1 2023, down from 26% in 2020-2021 and 24% in 2019. Examples of growth markets include Atlanta; Austin, Texas; Charlotte, North Carolina; Dallas; Miami; Nashville, Tennessee; Phoenix; Raleigh, North Carolina; and San Diego.
All other markets accounted for 35.2% of financial-services leasing activity in 2022 through Q1 2023, down from 40.1% in 2020-2021 and 34% in 2019.
Although gateway markets are seeing a comeback in the share of leasing activity from tenants like banks and insurance companies, it’s still not at the pace or volume it was before the pandemic.
In the past year, financial-services organizations have leased 29.4 million square feet of office space, an 16.8% decline from 2019 levels, said Sarah Bouzarouata, senior manager of research and strategy at JLL, focused on the financial industry specifically.
“If you look at the industry as a whole, real estate strategy varies widely,” Bouzarouata said. “Generally, firms are maintaining expense discipline … (but) they’re also thinking about their real estate needs.”
Lease terms have been slowly increasing on the whole across the industry since the pandemic, according to JLL.
Right now, a lot of financial-services firms are trying to figure out how innovation and technology like artificial intelligence plug into their business strategies, including their real estate, Bouzarouata said. Meanwhile, cost cutting is top of mind as the economy slows and interest-rate hikes have created financial pressure across industries.
For a lot of companies in the finance world, there is a renewed focus on building magnetic gateway hubs for talent, Bouzarouata said, which may explain why the share of leasing within the sector has ticked up in gateway markets in recent months.
Still, growth markets account for one-fifth of financial-services leasing activity, she noted, and there’s still a desire among companies to locate in a lower-cost market.
“But the pandemic has really taught financial-services firms that scalable talent is very important,” she continued. “This year especially, and in 2022, there’s this renewed focus on how to create a magnetic hub where employees can feel super engaged, productive and achieve (a company’s) innovative goals.”
Another commercial real estate firm that closely tracks leasing activity found a similar slowdown in leasing activity among FIRE — shorthand for finance, insurance and real estate — industries.
Savills PLC found FIRE leasing activity totaled about 3.1 million square feet nationally in Q2 2023, the second-lowest level of leasing activity within those industries since the pandemic. Leasing activity in 2022 topped 4 million square feet on a quarterly basis, with 7.5 million square feet leased in Q3 2022 alone.
An analysis of recent FIRE lease data provided by Savills indicates even some of the biggest, most notable office leases signed within financial services represent space reductions or subleased opportunities from tenants that’ve reduced their footprints since the pandemic.
British professional services and management consulting firm Aon PLC, for example, renewed its space at Aon Center in Chicago’s East Loop this year at 300,000 square feet, a notable deal in a post-pandemic office world but still a reduction in space, according to Crain’s Chicago.
In New York, Two Sigma Investments LP renewed its office space earlier this year at a SoHo office tower for 265,217 square feet.
One major FIRE tenant did expand in a 2023 lease deal — New York-based investment firm KKR & Co. Inc. signed on for 219,395 square feet at Hudson Yards in Manhattan in January, according to Savills. The space taken by KKR was originally leased by Meta Platforms Inc., Bisnow and other news outlets reported. The deal brought KKR’s space at Hudson Yards to about 560,000 square feet.
And, on the West Coast, Ares Management Corp. in January signed a 206,000-square-foot lease at an office campus underway in Los Angeles’ Century City district.
The most recent FIRE deal found in Savills’ data was Kaiser Permanente Insurance Co.’s 120,979-square-foot renewal at Two Greenwood Plaza in Englewood, Colorado, signed in late June.