Country's Largest Brokerages Mark Uptick In Office Leasing Revenue As They Post Quarterly Gains
Office leasing is finally making a slow return as the pandemic recedes, with most of the country’s largest brokerages seeing upticks in a segment of the commercial real estate market that has long been much of the industry's bread and butter.
With remote work keeping more than half of employees out of the office in the country’s largest cities and major companies declaring employees can work from wherever they want into perpetuity, office leasing has struggled in the last two years. But the tides seem to be turning, at least for now.
“Office has been stressed because, in part, of the conversation and the confusion about what occupancy is going to look like, what hybrid is going to look like,” said Newmark Group Inc. CEO Barry Gosin in his company’s second-quarter earnings call July 29. “But the reality is that CEOs are committed to office and companies have to be in the office at some point, and there's less hoteling than you might think.”
Newmark reported record revenue in the second quarter, growing by nearly 20% over the same period last year to $755M.
It wasn’t alone.
All of the country’s largest brokerages reported gains for the quarter, and most marked improvements over their 2021 performance in the office leasing space.
“We continue to see healthy activity across property types, with office being an outperformer, CBRE CEO Bob Sulentic said on his company’s Aug. 5 earnings call. “Office is growing from pent-up demand against the relatively low base of activity and higher-than-normal lease expirations.”
CBRE’s net income increased 10% year-over-year to $487M, and its core earnings per share leapt by a record 37%. Revenue increased in all major property types, led by office, according to the company’s earnings report.
The return of office leasing is highly anticipated in the commercial real estate community as lease rates remain depressed in most major markets, especially for older buildings. Companies seeking to attract employees back to the office have drifted toward newer or recently redeveloped properties, keeping Class-A lease rates higher.
“Quality property is still maintaining and retaining the rents that they get,” Gosin said. “We're actually doing some very large transactions for clients in coworking or flex work who are taking five-year leases in flexible work environments.”
Executives noted, however, that 2021 leasing volume was stifled, so the annual increases are still below pre-pandemic levels in many cases.
At Colliers, for example, office leasing in Q2 2022 was 29% lower than in 2019. That’s indicative of a long road back for the sector, with unanswered questions swirling about the staying power of remote work and how it will impact companies’ leasing decisions.
“Office leasing is anything but clear right now,” Colliers CEO Jay Stewart Hennick said in that company's earnings call Aug. 4. “And I think that that applies virtually around the world. You're seeing leases in offices. Some firms are being very bold, but most are taking still a short-term approach. They're taking their time to understand how their offices should be reconfigured. They haven't finalized plans on return to work and what that means.”
Still, Colliers overall results were strong, with a 64% increase in revenue compared to the second quarter of 2021 to $946M.
Commercial real estate executives also noted a coming avalanche of lease expirations that will give many large companies an opportunity to reconsider their space usage and how they want their offices to work going forward.
“We're expecting more leases to expire over the next 18 months than in any 18-month period over the last five years,” Sulentic said.
Sulentic said major corporate clients are likely to consolidate their space, though he views the expirations as an opportunity for his company to get deals done. He said he's confident that even with the consolidation, these large office users will still take a significant amount of space.
“And there is a large backlog of renewals that need to be dealt with, and they are — those renewals are going to get executed or they're going to move into new buildings,” he said. “So it's a factor of that huge volume of renewals coming, even if the space they take is somewhat smaller than it was before, that gives us confidence to talk about the numbers the way we did.”
In addition to uncertainty about the future of the workplace, economic concerns could also put a damper on office’s attempt at a rebound.
With rising interest rates meant to combat historic inflation and the threat of recession looming, businesses are operating with a greater degree of caution, which could stall leasing decisions.
But given largely positive results in the second quarter, commercial real estate executives expressed optimism for the industry’s continued recovery, especially in sectors that fared better during the height of the coronavirus crisis like industrial and multifamily. Capital markets are also expected to remain active in spite of interest rate concerns.
“Still, the tailwinds supporting our industry remain intact, labor markets continue to perform well and unemployment rates are low,” JLL President and CEO Christian Ulbrich said during his company’s Aug. 3 call. “There's sufficient liquidity in the market and a significant amount of capital yet to be deployed in the commercial real estate space.”