Office market may be weak, but tenants don’t get extreme deals

As the omicron variant continues to threaten a return to pre-COVID normality, many office tenants wonder if the market continues to ease. In search of competitive deals, tenants are considering renegotiating existing leases or reducing their footprint to remain competitive in a tight labor market.

But at the same time the the market has slowly softened… extreme offers for occupiers are rare, ”says Kirsty Cameron of Savills in a new report. “The reason is that while most office workers have worked from home throughout the pandemic, many businesses have continued to pay for their office space. Availability increased throughout the pandemic as occupants who had leases to renew or chose to sublet their offices. In order for owners to maintain financial and operational sustainability, their strategic response to the pandemic has been and continues to focus on increasing concession packages and rolling out other occupant benefits before lowering rental rates. “

And compared to other economic crises, the economic impact of the “black swan” of the pandemic quickly impacted CRE. The uncertainty associated with openings, re-openings, and emerging variants has caused the market to remain stable, instead of easing considerably.

“Savills advisers have noticed that traditional five- or seven-year lease extensions have gone down for many companies, down to a year or two,” Cameron explains. “As the vaccine was released and became more widely available in mid-2021, there has been an increase in occupant confidence that has given hope to many homeowners that businesses and their employees will soon be returning to their homes. offices. Due to the high availability of office space and the emergence of the Delta variant, the market downturn throughout the pandemic has not rebounded as owners hoped “by year-end.

Despite this, however, Cameron says she is seeing “generous” concessionary offers from landlords, launched in an attempt to retain tenants and fight back against high availability rates.

“There are many new and speculative developments that could allow the market to continue its trend towards high availability,” she says. “The combination of high availability rates and concessions allows the market to provide leverage to tenants. “

Signs of further weakness in the industry began to resurface this fall, as news of the omicron variant hit US markets. New office demand fell for the second consecutive month in October to its lowest rate since the first quarter of 2021, according to the VTS Office Demand Index. That’s a 30% drop from its peak in August 2021.

Despite this, however, some experts say it’s too early to predict the long-term effects of COVID on the industry.

“In some parts of the country, restrictive closures and mask mandates have prompted many employers to embrace remote work on a temporary or even permanent basis – with the hybrid option of a combination of in-person and remote work like popular third option, ”said Kelly Mangold, director of RCLCO Real Estate Consulting. “Other parts of the country have had largely in-person office workers over the past year and a half.”

Mangold predicts that within a year or two, many companies will reassess their office space needs, with a view to “host” or shared workspaces.

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