The Gap

by | Dec 1, 2020 | Uncategorized | 0 comments

Office market demand has fallen by more than half over this time just one year ago, and rates have remained somewhat flat. Look at this chart comparing Office Market Rent to Occupancy:
null
Source: CoStar Group www.costar.com

There has developed a significant spread between “bid” and “ask”.

Unfortunately for many corporate office tenants, understanding the true Fair Market Rent can be a frustrating experience. There are few comparable lease transactions happening, and the ones that are available are likely projects that either had started before C19 or represent renewals by equally uneducated tenants forced by a pending lease expiration to make a hasty decision.

We saw similar results after the 2007 Financial Crisis. Because of the long term nature of commercial leases, the office market did not bottom out until 19 months later.

Here are three tips if your lease expiration is approaching in 2021 or 2022 and/or you plan to negotiate now to reduce space under lease:

  • Recent Transactions – Understand what recent transactions happened and the circumstances behind them. Most relevant are leases that happened in the last 90 days, and be sure to look at both subleases completed and sublets offered. Be sure to value new leases over renewals which may have been made under “pandemic duress”.
  • Base Year – OpEx numbers have been volatile this year as disinfecting and social distancing procedures have been implemented. Most leases are adjusted to 95% occupancy levels and landlords have been cautious to continue to provide services (even as buildings sat vacant or nearly so) so that tenants could not declare default. Renegotiate to reset the Base Year to 2021.
  • Space Reductions – A lease is a financing technique and, like a mortgage, can in theory be renegotiated at any time. If you plan to reduce space and relocate, sooner is probably better than later in terms of net savings. Your landlord has the ability to substitute any space in the building, and maybe in their portfolio, so consider the benefits of a move to a smaller space now.

Many companies are sitting on their hands waiting until the new year or until the vaccine is widely distributed.  When they do act, there will be a flood of space placed on the market, making negotiations more difficult.  Don’t sit on the sidelines, get this figured out now and act.