Vestian's State of the Office Market Overview: A Perfect Storm
Since the beginning of 2018, real estate markets have been thriving with businesses leasing over 200 million square feet of Class-A, B and C office space across the 12 major metropolitan markets in the U.S. Class-A office deals accounted for nearly 70% of this total. Across the nation, net absorption was positive, vacancy rates were dropping, and lease rates were increasing. Business was booming for landlords and brokers in a landlord-driven market, according to Chicago based real-estate firm Vestian.
Fast forward to today and it's a much different story. The COVID-19 pandemic and its response completely froze business decisions on expansion, leaving today's businesses with an estimated 30-50% more space than they need. "It wasn't only COVID-19 that sparked this surplus," stated Michael Silver, Chairman of Vestian. "The landlord-driven market first ignited this issue over two years ago."
Before COVID-19, many businesses were practicing remote work, but most real estate brokers were not taking this into account when forming space solutions for their clients. "With landlords dictating terms, brokers were incentivized by the high payouts that came with appeasing landlord's soaring asking prices and rigid lease terms," added Silver. "Rather than thinking about real estate solutions as a whole, brokers were solely focused on leasing the physical space."
Brokers were poorly advising their clients to take on expensive, long-term, inflexible leases in "cool," trendy workplaces with the promise of securing top talent and elevating their image.
"Businesses are much more than just the space they occupy, yet this has not been represented in offered solutions over the last few years," noted Silver. "The inability of most real estate brokers to think outside the space has resulted in recommendations that have financially harmed tenants. We have seen this as a growing problem and COVID-19 has accelerated it 10-fold."
"Te tables are turning. For the next 3-5 years, landlords will be facing a market that will heavily favor tenants due to excess space brought on by the landlord-driven market and COVID-19," continued Silver. "The result is market opportunities for tenants not seen in 30 years with millions of square feet of office space becoming available as businesses shrink their footprint."
Here's what Silver anticipates happening in the office real estate sector in the coming months:
Class-A office space will face the steepest recovery.
Pre-COVID-19, direct vacancy in the top metro areas was sub 10%. As the nation emerges from the pandemic and subleases, shadow space and new construction come onto the market, availability will rise to the 15% range in top markets. While this is still considered manageable in most markets, Silver forecasts additional vacancies and availability based on leases expiring and not renewing and footprints being scaled down. This will drive up availability towards the 20% range. Further, Silver conservatively predicts that 30% of recently-leased space is no longer needed, leading to an additional 4% of availability, taking availability to the 20% - 25% range in the top metro areas. This will create huge ripples across office markets - especially Central Business Districts - driving lease rates down and increasing tenant concessions as landlords battle over eligible tenants.
Today's Advice Should Look Different:
"We are now in a new era for real estate," Silver continued. "New space with long lease terms and high rental rates justified by amenities and 'cool factors' are a thing of the past. Businesses need to focus on the work plan in total. And today, more than ever, this includes work outside the traditional office space."
1. Develop a new plan.
Silver's recommendation: "Tear up your old business plan and create a new one. The sooner you pull a plan together, the sooner you can act. Develop actionable measures and remedies to support your plan."
2. Consider more than just your physical real estate assets.
In addition to the physical real estate opportunities, remote working, access to best labor pools and revenue opportunities need to be incorporated as part of today's business plan.
3. Secure new space at discounted rates.
"We predict that in 4-6 months huge bargains will be prevalent allowing tenants to secure space at a 30% discount, with lease terms of 5 years or less and space refitted to allow distancing and IT retrofit," said Silver.
"As businesses seek new solutions, it is important that decision-makers find their voice," added Silver. "With a historical tsunami of space coming, doing so will put them in a position of power and help them drastically improve their real estate portfolio while radically cutting costs."
Founded in 2010, Vestian is a full-service real estate firm focusing exclusively on occupiers. With offices in the U.S., India, and China, Vestian helps clients transform their real estate holdings into distinct competitive advantages.
Vestian offers cohesive portfolio strategy and management, transaction advisory, corporate finance, project services. Vestian actively advocates for holistic space solutions that help clients thrive today and in the future.
Vestian serves leading organizations in a range of market sectors catering to IT, retail, hospitality and biotech companies including Bayer, Bosch, Cargill, Chrysler, 3M, Puma, Mercedes-Benz, Ryder, CSL Plasma, Texas Instruments (News - Alert), Union Pacific, Nike, Ericsson, Caterpillar, and many others. More information can be found at www.vestian.com.