How Early Do Large Office Tenants Renew in SoCal?

Large office tenants are renewing their leases early. According to research from CBRE, office tenants occupying 75,000 square feet or more in the greater L.A. area and Orange County renewed their leases an average of 22 months in advance since 2012. This timing allows users to make the best economic decision and to weigh rising rents. The same report also showed that tenants leased an average of 135,000 square feet with an average lease term of 101 months.

“Large tenants begin evaluating their real estate needs early because they typically require significant lead time to find a new location if the economics or physical attributes of their space or the location don’t work anymore,” Petra Durnin, director of research and analysis for CBRE Southern California and Hawaii, tells GlobeSt.com. “Also, large blocks needed to meet their requirements are difficult to find or for landlords to assemble. There are just 20 blocks of space 100,000 square feet and greater in L.A. County. This has prompted tenants with an average size of 135,000 square feet to renew an average 22 months early over the past six years.”

Most of the renewal activity for tenants in this size range took place in Downtown Los Angeles, followed by the Tri-Cities market, the South Bay and West L.A. While rental rates are rising, landlords, in general, will discuss an earlier renewal. “In spite of healthy demand from companies, landlords can face significant downtime and large improvement costs if a tenant moves, so they can be more motivated to discuss early renewal,” says Durnin. “The total cost of the renewal is almost always significantly less than relocating, so if the tenant’s space needs haven’t changed, they will most likely opt to stay. The disruption of moving is also a factor to sway a tenant toward renewing.  If market conditions change, tenants can look at restructuring to save money.”

The decision to renew, however, has more to do with pricing. Tenants are willing to renew at a higher rate for location, quality of the building and the property’s ability to attract and retain talent. “The war for talent is playing out in office spaces, amenities, and workplace strategies. In an effort to attract and retain top talent, tenants must consider such features as natural light, updated technology, access to public transportation, and unassigned seating for an agile workforce,” adds Durnin. “Surrounding amenities also play a key role and even demand for such features as concierge services have been on the rise. Our regional economy is tremendously strong, which has upped the ante in the war for the best people and with it the demands on and importance of the physical space.”

Smaller tenants, occupying less than 75,000 square feet, however, are waiting longer to renew office leases. Durnin says that there are more options for smaller tenants. “Smaller tenants are more agile to begin with and can move into unconventional buildings that often can’t accommodate larger companies,” she adds. “With the rise of creative redevelopment and flexible workspace, smaller tenants today have even more options. Depending on size and requirements, they might also consider the ever-increasing variety of co-working offerings across the region, providing them with even more choices and flexibility. Los Angeles is the second largest co-working market in the country. Out of 222 million square feet of office space, 4.1 million square feet are flexible space. So there’s a lot to choose from.”

The lead-time for office lease renewal is growing for both large and small tenants. “Tenants both big and small see real estate as a differentiator when it comes to attracting and retaining talent, so they are doing their due diligence earlier to meet those needs,” says Durnin. “Armed with accurate data and analysis on market conditions and an advisor who can present viable options and negotiate the best deal, tenants can determine the exact right time to renew or relocate.”