While occupants of office space typically make short-term rental decisions, this is not the case for Class A spaces in some key submarkets.
“The best building in the best submarkets frankly gets a better rental rate than anything we’ve frankly seen in my career, period” CBRE’s net lease specialist Will Pike told the company’s Spencer Levy on a recent podcast. “Whether you’re in New York, Dallas, Atlanta, Seattle, again, the micro-markets of a market, I think it’s too early to figure out the actual lease structure and just assume that all occupants are going to use shorter term leases.
Pike said that as office buildings become more expensive, occupants who make long-term investment decisions will continue to do so: make long-term investment decisions.
“Are you really going to make a short term office decision that is quite expensive?” I don’t think so, âhe said. âI don’t see much difference from 2019 and before. “
ICSC Chairman and former VEREIT CEO Glenn Rufano told Levy that tenants are also likely to move into longer-term leases as rents level out.
“If a tenant wants a 10-year lease and there’s a lot of Tis, the first thing they’re going to say is you pay for it, right?” But over time, it evens out the rent. There is justice to that, âhe said. âAnd I think when the rents start to change, tenants will say again, I want more time than shorter because they don’t want to get caught with a higher rent. It is therefore only a question of supply-demand pricing. And I think once the equilibrium is struck, we’ll see that the tenant market is not that skewed over time.
Large office tenants were shortening lease terms even before the pandemic in cities like New York and San Francisco, and COVID-19 ushered in a new era of star models as occupants recalibrate space and personnel requirements. CBRE’s 2021 occupant survey found that in the United States, 62% of employers plan to adopt a hybrid schedule with employees commuting to the office 2.5 days a week. A higher fraction of U.S. occupants expect their office space to contract, to 44%, compared to 29% who expect expansion and 27% who expect no change.