Is the Commercial Real Estate Market Struggling?
Office leases have been a topic of speculation for the past year and a half. Since the pandemic began, people started talking about what would happen to current lease agreements with everyone working remotely, how companies would view lease renewals, and related topics. Many people thought the commercial real estate sector would take a hit, so is the commercial real estate market struggling?
Surprisingly, neither companies nor landlords have made any major changes to the way they do business. With all of the uncertainty surrounding offices reopening, especially in light of the delta variant, both parties are taking a wait-and-see approach to their lease situations.
Through Q2 of 2021, office leases were slightly up in the United States by roughly half a percent. Office vacancy rates have stayed consistently around 15% over the past year and the average price per square foot for an office lease has increased to almost $39 in 2021.
The reason things have stayed more or less normal since the pandemic is the uncertainty of the next phase of work. As companies evaluate when to return to the office, how to implement a hybrid working arrangement, and what new safety measures to put in place, commercial real estate has maintained the status quo.
According to a recent Korn Ferry article, “With so much uncertainty around where restrictions are easing versus tightening, both landlords and tenants are content to play the waiting game, says Darin White Eydenberg, global head of real estate private equity for Korn Ferry. “There’s no point in renegotiating now if you aren’t sure how much space you need,” she says”
Another factor is the typical length of a commercial lease. They tend to range in the five to fifteen-year range. Many leases are not yet up for renewal, so tenants don’t have a lot of leverage. And depending on what the next year holds, we may see renewal issues dragged out for the next few years.
According to the National Association of Realtors, office acquisitions were down 15% year over year, and companies that signed new leases moved into smaller spaces than they previously had. Lee Associates reported, “Since Covid, there have been about 800,000 lost office jobs. Although some models forecast those jobs will be recovered by early next year, the previous relationship between job growth and space requirements has been disrupted. The big question is, as the pandemic subsides, how much of the quarantine culture will remain part of the post- Covid workplace? How many and what type of companies are likely to adopt office/remote hybrids with slimmed-down employee footprints?”
One example where remote working did create a significant impact is Target, which reduced their office footprint by one million square feet. Many large companies are reducing their overall footprint and realizing savings of tens of millions of dollars. According to Jamie Dimon, JP Morgan CEO, “Remote work will change how we manage our real estate. For every 100 employees, we may need seats for only 60 on average. This will significantly reduce our need for real estate,”
While the industry is continuing to maintain itself, the next year will provide a better lens through which to predict the near-term future of commercial real estate. As of today, it doesn’t look like the bottom is going to fall out, nor does it appear poised for significant growth. If you have questions or hiring needs in the real estate sector, send us a note, and one of our retained recruiters will respond as quickly as possible.