The pandemic has not killed the office market

NEW YORK — Two years into the COVID-19 pandemic, the exact course of the office sector’s future remains uncertain. But more and more signs are emerging that many office buildings will do just fine.

In addition to a surge in office property acquisitions by large investors that often serve as indicators of where the industry is heading, office leasing rose significantly in most major markets in the fourth quarter. 2021, according to Sarah Dreyer, Washington, DC – senior vice president of research and data services with commercial real estate services firm Savills.

In fact, rental volume in major markets in the last quarter increased by 89% compared to the fourth quarter of 2020, with demand for direct rentals coming from a variety of sectors, adds Dreyer.

Of the 20 largest office leases signed in the fourth quarter of 2021, half involved agreements with technology and financial services companies, notes Kevin Morgan, president based in Reno, Nevada for the Northwest / North Central region. and head of agency leasing with real estate services company Colliers International. For example, Meta Platforms (formerly Facebook) signed the largest new office lease in the last quarter, taking 598,112 square feet at Sixth and Guadalupe, an office tower under construction in Austin, Texas.

“Tech companies continue to make large office commitments, despite the growth of remote work,” Morgan says.

“A combination of traditional office tenants – financial, accounting, consulting and legal firms – as well as large technology users show a preference for larger direct transactions, in the form of renewals or moves,” notes Jeff, based in Dallas. Eckert, president of the United States rental agency with commercial real estate services company JLL. Big Tech remains by far the most dominant leasing driver nationally, he adds — the sector has expanded office space by more than 9 million square feet during the pandemic.

According to Savills’ Dreyer, in addition to Meta, major tech tenants that committed significant amounts of space in 2021 included Amazon, Microsoft, Hulu, Hubspot, Apple, Riot Games and Activision/Blizzard. Meanwhile, the federal government also leased a significant amount of space last year, particularly in the Washington, DC area, she adds.

In the fourth quarter, total office leasing volume was highest in Manhattan, where tenants signed 9.3 million square feet of office contracts, according to Savills data. Meanwhile, San Francisco saw the largest year-over-year increase in rental activity, up 400% to 1.8 million square feet.

“It was a positive sign, as San Francisco was arguably the market hardest hit by the effects of the pandemic,” Dreyer says.

Other major U.S. cities, including Boston, Dallas and Los Angeles, all saw strong office space absorption in the fourth quarter of 2021, according to Colliers’ Morgan. However, the markets experiencing the greatest rebound in office demand, as measured by net uptake, are second-tier, tech-friendly cities such as Austin, Nashville, Tennessee and Salt Lake City.

What are tenants looking for?

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

According to JLL’s Eckerts, tenants signing new leases today show a strong preference for newly delivered and under construction products. JLL data shows that 24.7% of new rental activity in recent quarters was in buildings delivered after 2015, despite the fact that they represent only 12.8% of total office stock in the States -United.

However, when it comes to potential tenants’ plans to expand or contract, the picture is less clear, according to Dreyer.

“There is no one-size-fits-all solution, with some companies increasing space to allow for more distance between employees and common areas/collaboration space, and some taking up less space as models of hybrid work are implemented on a long-term basis,” she notes.

The potential size of many office tenants’ total footprint will remain uncertain until there is a larger-scale return to the office, Morgan agrees. “Given existing rental commitments and the time it will take to find optimal solutions for the workplace, it will take several years for all of this to come to fruition,” he says.

More and more new office leases are being signed – 18 of the 20 largest transactions in the fourth quarter involved new commitments rather than renewals, according to Morgan. And “In terms of relocations, there hasn’t been the much-vaunted shift to the suburbs from inner cities as some commentators had predicted,” he notes. But new rental commitments tend to be shorter than before the pandemic.

The duration of new office leases dropped dramatically during 2020 according to Eckert, from a typical range of 8.5 to 9.5 years to 6.7 years. But a growing share of new leases in the 10+ range signed in 2021 helped push the average to 7.8 years.

“As tenants seek greater flexibility in the future, rental terms will likely remain slightly shorter than before the pandemic as part of a structural shift in market dynamics,” he says.

A recent increase in longer-term leases may reflect businesses taking advantage of the favorable terms currently offered by landlords. According to data from Colliers International, asking rents are largely flat in most markets, with Class A office rents averaging $52.40 per square foot in the central business districts (CBDs). and at $34.20 per square foot in the suburbs.

But the gap between asking and actual rents is widening, notes Morgan. Tenant concessions also continue to rise, he says, with landlords offering both rent reductions and higher tenant improvement (TI) allowances. There is evidence that IT is crossing the $100 per square foot mark in major markets, Morgan adds. According to Dreyer, landlords are also allowing greater flexibility in rental terms, including options for expansion/contraction and termination.

Due to the generous concessions, net effective rents for Class A office space in the CBD are now 7.1% below pre-pandemic levels, according to Eckert (although this represents an improvement on the decline 18.9% recorded in 2020).

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Jose C. Birney