Sensing A Tenant’s Market, Companies Go Looking For Office Space Deals, Report Finds

After a stalled office leasing market in 2020, a new report suggests tenants resumed decision-making last year despite the uncertainty posed by coronavirus variants.

As relocations and expansions increase in volume, office users are shifting their focus to new and improved spaces, according to a CBRE report provided to Bisnow.

During the last three quarters of 2020, nearly half of office transactions were renewals, pointing to a cautiousness among companies, or at least a wait-and-see attitude. Only 23% of leasing deals during that period involved a relocation, and only 17% involved expansions, the report found. 

In the first three quarters of 2021, by contrast, just 32% of transactions involved renewals, while relocations were up to 33% and expansions to 24%.

"At the height of the pandemic in 2020, a lot of renewals were taking place because a lot of tenants weren't sure what the future was going to hold," Julie Whelan, CBRE’s global head of occupier research, told Bisnow.

"What we've seen more in 2021 is that tenants were willing to make longer-term decisions," Whelan said. "They were willing to relocate, especially into better-quality space if possible."

Primary markets in particular saw a considerable uptick in relocation activity in the first three quarters of 2021, according to the report, which CBRE says illustrates tenant confidence. This move to find new space might also represent a growing tenant's market.

"We're certainly in an environment where it's more of a tenant's market than it has been over the last decade," Whelan said. "Leases don't stop rolling. Every day, tenants have leases coming up for either renewal or some other form of action."

Other brokerage reports support the conclusion that tenants were beginning to firm up their longer-term space utilization plans last year, despite the impact of the delta variant. Leasing activity rose once again in Q3 2021, JLL found, most notably in fast-growing secondary markets, while sublease space contracted modestly and occupancy losses slowed once again. 

Whelan said she has also seen an uptick in tenant incentives and downward pressure on rents, though not everywhere.

"That dynamic isn't universal across all markets and across all states," she said. "That's really important to know. There are some markets that are performing in line with pre-pandemic averages, such as Austin, and others that continue to be challenged, such as San Francisco."

In its Q4 2021 report, Avison Young found that tenant improvement allowances have grown markedly in many markets. In 2019 in Manhattan, for instance, the average was $80 per SF. In 2021, that average had risen to $134 per SF.

Other markets showed gains as well, though not quite so dramatic. In Los Angeles, the average rose to $102 per SF last year from $88 in 2019, and Washington, D.C., allowances rose to $113 from $98. Chicago, by contrast, saw TIAs drop from an average of $85 to $80.

Relocations also reflected a hunt for higher-quality space, the CBRE report says, especially in primary markets like Manhattan and Washington, D.C., forming part of employers' strategy to attract employees back to the office more regularly, which has proved a tough proposition so far. Even so, some landlords are gamely trying to make their buildings attractive to workers again.

"There are landlords who have much more active management over their buildings than they used to, much more of an influence over the experience that their tenants have in the building," Whelan said. "So you see some progressive landlords that are doing that today and wrapping hospitality and shared amenities into their building envelope."

Even with a more gradual re-entry pace and potentially more hybrid work schedules than initially expected, the role that physical offices play in fostering corporate culture and productivity will underline the longer-term need for space, the JLL report noted.

"Tenants are still taking advantage of more subdued levels of competition and elevated concessions, although this is starting to shift at the top end of the market as flight to quality accelerates and intensifies," JLL Director of U.S. Office Research Phil Ryan said. 

For its report, CBRE analyzed office industry leasing metrics by comparing the first three quarters of 2021 to the last three quarters of 2020 to factor out how different the market was in Q1 2020 from every quarter that followed. 

In effect, the report is comparing conditions during the first half of the pandemic period with the second half, at three quarters each. Or, very roughly, the pre- and post-coronavirus vaccine periods.

Leasing activity measured for the report totaled nearly 140M SF of transactions over 20K SF between Q2 2020 and Q3 2021, CBRE reports, with leasing volume gaining ground from Q1 to Q3 2021, when 76.8M SF were leased, compared with the previous three quarters, which saw 62.3M SF of leasing.

"This doesn't mean that we're at pre-Covid levels of activity," Whelan said. "We're still working toward that, and we aren't reversing course." 

As for the onset of the omicron variant, which hit after the end of the third quarter of 2021, Whelan made an optimistic prediction, comparing its impact to delta, which she said didn't derail activity in the office market so much as delay it for a while.

"Omicron didn't really rear its like ugly head until December, right?" Whelan said. "But if you look at what happened during delta, it didn't really throw us off course. It might have stalled things a bit, but likewise, we don't think omicron is going to reverse the trends that we've been seeing."

So far in the U.S., the omicron variant has caused a swelling of Covid-19 case counts and jammed hospitals in many parts of the country, but it hasn't correlated to as steep a spike in the number of deaths.

Though not included in the report, Whelan said that office leasing data collected by CBRE in October and November 2021 show a continuation of the leasing trends observed by the report during the first three quarters of 2021. The market thus had some momentum going into December, but it isn't yet clear how omicron will impact that momentum.