Home News With 900M SF Of Office Leases Expiring By 2025, Owners Are Getting More Aggressive

With 900M SF Of Office Leases Expiring By 2025, Owners Are Getting More Aggressive

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Office owners have dealt with more than two years of uncertainty about the future of the property, but space demand is about to face even more severe challenges.

According to JLL, about 11% of US rental office space is expected to expire this year, which is equivalent to about 243 million science fiction. This is a 40% increase from 2018. By 2025, 900 million SF office leasing nationwide is expected to expire.

Office building owners are staring at the expiration of a huge number of lease contracts this year.

“It is expected that a great deal of space will be available in the next two years, and the landlord is responding by giving more concessions,” said Michael Silver, Chairman of Vestian Global Workplace Services. “The situation is very complex and fierce competition for tenants has begun.”

Many tenants favored short-term lease renewals during the initial uncertainties of the pandemic and postponed lease expiration to a point where most of the office market could tip over in the next few years.

As more data show future distress and loss of value, these owners are facing an imminent supply crisis that can take years to resolve.Green Street Analyst Demand for office space is expected to decline by 15%..This month’s New York University analysis predicts offices across the country Losing $ 500 billion in value by 2029..

Monetary concessions on leases have increased significantly since just six months ago, according to Silver. Soft markets, which are expected to soften, present more challenges in the current financial environment.

Savills data provided to Bisnow In the first quarter of 2022, we found that a new lease of top-class office space in Washington, DC reduced rent, usually for 24 months. That’s 14 months in Chicago, 13 months in Houston, and 18 months in Midtown Manhattan. Many In the report I got it Landlords offer a wide range of free rent periods while maintaining or raising rents, effectively broadcasting higher asset values ​​and undertaking rents for less.

Owners are faced with the prospect that at some point in the future they will need to refinance at lower incomes and higher interest rates. Belt tightening by companies that are in a pinch of a difficult economic situation can exacerbate the situation. The potential for landlord distress means that the tenant can be even more difficult and make sure that you are signing with a well-capitalized owner.

Exclusive service consultant Silver compared the future of the office market with the future of shopping centers. This is a “gradual deterioration” process in which fewer and fewer people come to the office, fewer tenants renew, and office real estate slowly but steadily loses value. It will be rolled out in the next 10 years.

As the story of post-pandemic recovery and reinstatement hits the heightened fear of recession head-on, office owners have seen many recent data points that provide a reason for pessimism. In major markets, foot traffic still lags behind pre-pandemic standards. Placer.ai data Visits to San Francisco office buildings in May decreased by 67.8% compared to May 2019. Visits to Chicago and New York decreased by 45.7% and 40.6%, respectively.

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High rates of office rents for renewals lead to speculation of a downturn in office real estate.

However, according to Julie Welan, Global Head of Occupia Sort Leadership at CBRE, leasing activity is increasing this year, saying demand today is stronger than it was a year ago. The new leasing accounted for 75% of all leasing activity in the first quarter, and “tenants are making long-term decisions about their portfolio,” she said.

Brokers are seeing more and more lease renewal debates in this environment, and landlords are eager to keep their tenants happy. Mike Watts, Investor Lease President of CBRE Americas, said he would be happy to accept discussions about lease renewals ahead of normal as more tenants need to change offices that require capital investment.

“Stabilizing their rent is positive for building owners,” Watts said.

Watts added that his brokers are currently spending more time with their tenants, understanding their long-term needs and aiming to create “now” solutions.

According to Seth Nelson, Colliers CEO of Occupier Services, companies are monitoring office usage occupancy and data to get an idea of ​​the future. It’s not a dramatic reduction that cuts the footprint in half, with the exception of companies that expand their footprint, which isn’t the norm these days.

“There is a debate about the right time to make these commitments, as leverage is so much better for tenants in many places,” he said.

However, companies are also aiming to delay these decisions as much as possible as they seek to develop strategies in the context of hybrid work and office schedule uncertainties, said David Burden, Colliers Principal of Occupier Services. I am saying. Most people think that the number of seats per employee is less than one. This is a shift aimed at saving costs given the growing popularity of remote work, even if in the end everyone wants to return to a more regular schedule.

“It’s a pound’s stupidity, like a penny,” said the burden on the diminishing footprint.

Real estate accounts for about 5% of many companies’ expenses, while labor accounts for 65% of total pre-inflationary expenses, making it a more competitive labor market today. Investing in real estate could ultimately save money if you think of it as an investment in retaining talent, Baden said.

But Silver’s wise strategy is to ignore the military expansion competition for higher quality office space and secure funding, selling real estate stock to create a cash cushion for outside investors. It suggests that you may raise capital by doing so. But he sees more owners and landlords, Newly refurbished space Instead of retaining capital over the long term, you’re going to make old buildings less competitive, take the opposite approach, and “put in flashy running tracks and things that tenants don’t care about.”

It can get difficult quickly. MSCI Real Assets found that April commercial real estate sales were $ 39.4 billion, down 16% year-over-year. This is the first decrease after an increase for 13 consecutive months. At least one major investor estimates the value of commercial real estate as follows: Already down to 10% From last year.

“You will have to find money to hold somewhere,” Silver said. “If you can’t find it, return the key to the lender.”

There are positive indicators in the market. CBRE Watt expects 2023 to be a “pretty strong leasing market” as tenants better understand the impact of the pandemic on the business and finalize future plans for space use. ..

However, these observations have a small footprint as the likelihood of a recession increases over the next year or two as many companies make more solid and long-term decisions about post-pandemic office space.Office capacity in the near future Still grows at about 1% per year It is based on what is already in the pipeline.

Owners may be sweating in the next few years of a tenant-friendly market, but companies that take too long to make the final decision may regret it, Baden said. rice field. Tenants currently active in the current market have good space on long-term leases. He sees this in his domestic market in Chicago. There, new towers, or preferred buildings near the Chicago River, are seeing considerable trading speeds.

“Many companies are looking at this with different lenses,” he said. “They say,’We’re going to fill up the space now and look for something good.” They are looking for a few years before the excuses stop. “

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