This is What the Upcoming Tenant’s Market Will Look Like

Think there is a tenant’s market right now? Stay tuned. As the nation begins to climb out of the depths of the COVID-19 crisis, landlords will “battle” over office tenants, according to a new report from Vestian, creating a tenant’s market unlike any other over the past few decades.

The office marketplace will be “littered” with millions of square feet of available space, providing opportunities tenants haven’t seen in more than 30 years, the report says.

Class A office will have the toughest time, as Vestian predicts availability will rise to the 15 to 20% range in top markets and additional vacancies cropping up as leases expire and tenants pare down their real estate footprints. In top metro areas, availability may hit 20 to 25%, creating “huge ripples” across office markets and CBDs.

The COVID-19 pandemic dealt a serious blow to the momentum of most US office markets, which had been thriving since the beginning of 2018. That year, businesses leased more than 200 million square feet of Class A B, and C space across 12 major metro markets, with Class A deals accounting for nearly 70% of that space.

And according to Vestian’s report, COVID isn’t the only factor at play in the state of the office market today: “Before Covid-19, businesses were practicing remote work, but most brokers were not taking this into account when forming space solutions for their clients,” the report states. “With landlords dictating terms, brokers were incentivized by the high payouts that came with appeasing landlords’ soaring asking prices and rigid lease terms. Rather than thinking about real estate solutions as a whole, brokers were solely focused on the physical space.”

The report pulls no punches when it comes to brokers’ roles: they were “poorly advising” their client to take on “expensive, long-term, inflexible leases to secure large footprints in ‘cool,’ trendy workplaces with the promise of securing top talent and elevating their image. However, this decision-making had weak underpinnings….We have seen this as a growing problem, but it wasn’t until Covid-19 that it accelerated tenfold.”

Now, tenants have between 30 and 50% more space than they need, and Vestian estimates that an extra 60 million square feet of Class A space would take five to seven years to absorb if it comes back to market. If 30% of the 200 million square feet of space leased over the last two and a half years returns to market, vacancy nationally will push up to close to 25%. And that doesn’t include the extra space that will come back naturally.

Another factor to consider is that the outlook for job growth in office-dominant industries—likely driven at least in part by increased automation—is less favorable than in years past. Green Street predicts that the general trend toward increased space efficiencies will likely linger for far longer than previously forecast—which will in turn reduce net absorption.

Companies are already on their way to taking far less space than previously budgeted. Whitley Collins, Global President of CBRE Advisory & Transaction Services, previously told GlobeSt that activity likely will perk up in 2021 as vaccines roll out, but that “companies will map out their long-term office strategies with new emphasis on determining the most efficient use of workspace with more employees working flexibly from multiple locations.”

Source: GlobeSt.com

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