Office landlords and the tenants they lease space to are both shifting into a new leasing paradigm more than four years after the onset of the Covid-19 pandemic.
While it’s been well established the pandemic permanently changed norms around in-office versus remote work, it’s taken years for landlords and occupiers alike to figure out how to navigate office-space decisions because of those shifts. And while the office market’s challenges will be felt for years to come, there’s become greater clarity from both owners and lessees of real estate around how to traverse the complicated office market.
A majority of landlords — 82% — in VTS Inc.’s fifth annual landlord survey said they are seeing the length of renewals increasing or holding steady. Additionally, 57% of landlords said retaining and renewing tenants was their No. 1 priority, compared to 41% that picked leasing vacant space.
Ryan Masiello, co-founder and chief strategy officer at VTS, said this year’s survey, when compared to previous iterations, indicates there’s more certainty among landlords about the path forward in the aftermath of the pandemic.
For many landlords, that means investments in tenant and common spaces at their buildings, with 47% of landlords surveyed saying property improvements were a key priority for them this year.
That includes technology investments, with 33% of landlords saying they were investing in tenant-experience technologies at their buildings. That percentage ranked ahead of 31% who said they were investing in outdoor communal areas, 30% who said property operations, 27% who said food-and-beverage options and 27% who said fitness centers.
“Over the past couple of years, landlords were inching toward navigating the market and making investments in certain things from a digital perspective. … It comes out quite clearly that a lot of dollars are being poured into modernizing the way landlords are managing their process to attracting tenants, and the experience they have once they get to a building,” Masiello said.
It’s also become more important for landlords to retain companies currently on their tenant roll — even more important, according to the survey, than leasing vacant space. There’s been a significant increase in the office vacancy rate since the start of the Covid-19 pandemic, hitting a record 19.8% in the first quarter of this year, and a staggering amount of sublease inventory has been listed, much of which is being converted to direct vacancy as those leases expire.
Many tenants in the market right now are looking for a deal, Masiello said, and landlords are still offering lofty concessions like tenant-improvement allowances and a period of free rent to lure a more shallow pool of companies in the market today. Some landlords are getting creative with concession offerings by negotiating a way for tenants to use credits to access on-site amenities like conference or fitness centers.
“[Landlords are] trying to tie the amenities in the building to the lease, if you will, and make those as an additional concession,” Masiello said.
Tenants start to find their footing
A separate survey of small-business owners, executives and leaders by The Business Journals examined how occupiers are thinking about their space needs.
It found 42.3% of survey respondents leased their office space, 32.1% owned it and 14.9% had a mix of owned and leased space. About 11% said they didn’t have office space.
Echoing the findings of the VTS survey, 41.8% of the executives who responded to The Business Journals’ survey said they plan to renew their lease in their current office space, while another 14.9% said they were unsure about their future plans for their leased office space, 13.6% said they didn’t have an office and didn’t plan to get one, and 11.2% said they planned to expand to a larger space.
Slightly more than half of the respondents said their companies’ employees were in the office at least three days a week, with 30.3% indicating they were in the office five days a week and 21.5% saying they were in the office three to four days a week. Only 8.7% said most of their employees are fully remote.
An overwhelming majority of respondents — 65.1% — said they had not changed their office space square footage since March 2020, while 16.8% indicated they had reduced their office space by some amount. Meanwhile, 18.1% said they had expanded by some amount since the pandemic.
As for pricing, 24.1% of the executives who responded to The Business Journals’ survey said they were neutral about a potential price increase for their next lease, while 18.6% said they were “very concerned” and 18.1% said they were “slightly concerned.”
Asking office rates have been holding fairly steady since the pandemic, but effective rents declined 0.04% in the first quarter, according to Moody’s Analytics Inc.
Speaking about the VTS landlord survey and more broadly about the market, Masiello said the office sector is beginning to shift into a reset, where landlords and tenants feel more confident about their space decisions.
“You’re starting to see the stabilization and consistency of people know what they need to operate in the new world, and it’s much more distinct in this survey than we’ve seen in the past,” he said. “I think that’s a good sign for the office market — there’s a confidence in what needs to happen to navigate [the market].”
Source: “Surveys of landlords, occupiers suggest increased confidence in office-space decisions“
