Should Tenants be Fooled by the Landlord's Optimism?
Everyone is talking about it. The impacts of COVID-19 on our economy have been far reaching with no industry left out, though some are bouncing back quickly. Residential real estate, for example, has seen a boom with interest rates at all-time lows and people looking to be more comfortable while stuck at home. The office market has, understandably, gone the other way, as companies reconsider the size of their office footprint due to the surge in operating a remote workforce. They realize this might be a sustainable future, so why pay for excess real estate?
What is Cresa seeing?
• Expanded concession packages are an early sign that landlords are open to stretching.
• Vacancies have increased and will continue to increase as sublease spaces turn direct in the next 24 months, with 2.1M SF of sublease space set to expire by the end of 2022.
• Even the most optimistic absorption scenarios will not backfill Covid vacancies to justify 2019 rents any time soon.
• Companies desire to return to the office to maintain culture and engagement despite the convenience of video conferencing technologies.
Those statistics alone should be daunting to landlords, but when combined with the current headlines its down-right alarming. San Francisco is already seeing a shift in demand as tenants look to rethink space from their current physical footprints. With historically low vacancy and substantial demand for office space, San Francisco has been considered the most expensive office market nationally.
We believe that the same office market forces are also occurring in the greater D.C. metro area and the data is similar. If you have significant questions about your current real estate strategy, it may be time for a discussion. Once we have started our conversation, we can create a strategy to look at your business operations and current space and then craft up a plan to find something that is a great fit in the area. With the current vacancies and inventory, we will work with you to get the best deal. We represent tenants ONLY, so you can feel comfortable that we are working for your business 100%. If we can help you by being your tenant broker in the DC, Maryland, or Northern Virginia area, visit my website or call me at 301-841-6542. Make sure to follow all my social efforts by clicking on the links below.
Daniel Shapiro
Commercial Tenant Broker
2 Bethesda Metro Center, Suite 900
Bethesda, MD 20814
301-842-6542
Like me on Facebook
What is Cresa seeing?
• Expanded concession packages are an early sign that landlords are open to stretching.
• Vacancies have increased and will continue to increase as sublease spaces turn direct in the next 24 months, with 2.1M SF of sublease space set to expire by the end of 2022.
• Even the most optimistic absorption scenarios will not backfill Covid vacancies to justify 2019 rents any time soon.
• Companies desire to return to the office to maintain culture and engagement despite the convenience of video conferencing technologies.
• Tenants with lease expirations over the next three years should weigh their options and expect landlords to compete.
With an additional 1/3 (2.1M SF) of marketed sublease space expiring by the end of 2022, the reality for landlords is that there will be nearly 9.5M SF of direct space sitting vacant in two years. At that rate, direct vacancy would hit 11.5% in the direct market. Typically, tenants look for space 1-2 years ahead of their lease expiration, so smart landlords should be treating the 2022 market as if it’s the current reality. Basic supply and demand economics suggest an even steeper vacancy cliff is coming and tenants should be encouraged by the coming market shift. Meaning, tenants are the ones who should be optimistic.
While some landlords speculate that a portion of the sublease inventory will be reoccupied, many larger blocks of space will not be. Larger tenants were land banking during the previous tight market. With ample current vacancy and changes in workplace strategies to accommodate varying degrees of agile work, most tenants no longer need to carry this type of expensive “insurance” to protect their growth.
YoY direct availability increased 4.9M SF (70.3%), while YoY sublet availability increased 6.6M SF (149.0%). That’s staggering. So, what needs to happen to get back to pre-pandemic availability levels? To offset the 11.5M SF surplus, the entire Salesforce Tower building would need to be transacted eight times over. Facebook (755K SF at 250 Howard) or DropBox (736K SF at 1800 Owens) would need to lease 15 times more space than they did in 2019. Pinterest would need to take 23 times (488.5K SF) the space they had at Bluxome Street.
To illustrate how a large market has been impacted, Cresa looked at what has and is happening to the San Francisco office market. The San Francisco office market has been one of the hardest hit in the country. Nearly 70% fewer transactions were completed in 2020 vs the prior year, putting San Francisco far behind the velocity it once enjoyed. Historically, San Francisco had market fundamentals that fueled a quick rebound, but even the most optimistic projections suggest that landlords should be concerned. Is it fair to say that with only 7.3M SF of direct vacancy in a market with 82.7M SF - things could be worse? Maybe so. In years past, total vacancy (direct plus sublease) did not exceed 8.5%. Today, direct vacancy alone records 8.8%. This represents more than a 4.0% increase YoY on a direct basis. Current direct vacancy would be manageable if nothing else changed. The problem is, the current market landscape is about to create more vulnerability for landlords and consequently, opportunity for tenants.
With an additional 1/3 (2.1M SF) of marketed sublease space expiring by the end of 2022, the reality for landlords is that there will be nearly 9.5M SF of direct space sitting vacant in two years. At that rate, direct vacancy would hit 11.5% in the direct market. Typically, tenants look for space 1-2 years ahead of their lease expiration, so smart landlords should be treating the 2022 market as if it’s the current reality. Basic supply and demand economics suggest an even steeper vacancy cliff is coming and tenants should be encouraged by the coming market shift. Meaning, tenants are the ones who should be optimistic.
Absorption
With landlords and tenants looking at the market from very different perspectives, let’s look at what the numbers have to say. San Francisco recorded 5.8M SF of negative absorption in 2020, undoing all positive absorption accumulated in 2018 and 2019 combined. Specifically, direct absorption took a nosedive as leasing activity declined. Direct vacant square footage increased 76.1% YoY, and sublease vacant square footage increased 219.2% YoY. Total vacancy in San Francisco doubled, from 6.1% at the end of 2019 to 12.7% by the end of 2020. Surges in vacancy can be mostly attributed to tenants who have vacated their spaces. Tenants are playing a wait-and-see approach as the best time to return to the office is unclear.
While some landlords speculate that a portion of the sublease inventory will be reoccupied, many larger blocks of space will not be. Larger tenants were land banking during the previous tight market. With ample current vacancy and changes in workplace strategies to accommodate varying degrees of agile work, most tenants no longer need to carry this type of expensive “insurance” to protect their growth.
YoY direct availability increased 4.9M SF (70.3%), while YoY sublet availability increased 6.6M SF (149.0%). That’s staggering. So, what needs to happen to get back to pre-pandemic availability levels? To offset the 11.5M SF surplus, the entire Salesforce Tower building would need to be transacted eight times over. Facebook (755K SF at 250 Howard) or DropBox (736K SF at 1800 Owens) would need to lease 15 times more space than they did in 2019. Pinterest would need to take 23 times (488.5K SF) the space they had at Bluxome Street.
Companies locate here for the superior work force and culture of innovation, and that remains intact. The question is, can occupiers leverage the current market to keep their space options open? If so, it’s a great time to be a tenant.
Those statistics alone should be daunting to landlords, but when combined with the current headlines its down-right alarming. San Francisco is already seeing a shift in demand as tenants look to rethink space from their current physical footprints. With historically low vacancy and substantial demand for office space, San Francisco has been considered the most expensive office market nationally.
We believe that the same office market forces are also occurring in the greater D.C. metro area and the data is similar. If you have significant questions about your current real estate strategy, it may be time for a discussion. Once we have started our conversation, we can create a strategy to look at your business operations and current space and then craft up a plan to find something that is a great fit in the area. With the current vacancies and inventory, we will work with you to get the best deal. We represent tenants ONLY, so you can feel comfortable that we are working for your business 100%. If we can help you by being your tenant broker in the DC, Maryland, or Northern Virginia area, visit my website or call me at 301-841-6542. Make sure to follow all my social efforts by clicking on the links below.
I specialize in providing comprehensive real estate services,
exclusively representing corporate tenants on all commercial real estate needs.
Commercial Tenant Broker
2 Bethesda Metro Center, Suite 900
Bethesda, MD 20814
301-842-6542
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