Short-Term Office Leases Won't Stick Around Forever
As office buildouts get more expensive, occupiers will make long term capital decisions.
While occupiers of office space are generally making lease decisions with the short term in mind, that’s not the case for Class A space in certain key submarkets.
“The best building in the best submarkets are frankly garnering a better lease rate than we’ve frankly ever seen in my career ever, period,” CBRE net lease specialist Will Pike told the firm’s Spencer Levy on a recent podcast. “Whether you’re in New York City, Dallas, Atlanta, Seattle, again, micro markets of a market, I think it’s too early to determine the actual lease structure and just assume that all occupiers are going to use shorter term leases.”
Pike said that as office buildouts get more expensive, occupiers making long term capital decisions will continue to do just that: make long term capital decisions.
“Are you really going to make a short term office decision that’s quite costly/? I don’t think so,” he said. “I don’t see much of a difference where we were from 2019 and before.”
ICSC Chairman and former VEREIT chief executive Glenn Rufano told Levy that tenants are also likely to move toward longer term leases as rents equalize.
“If a tenant wants a 10 year lease and there’s a lot of Tis, the first thing they’re going to say is, you pay for it, right?..But then over time, it equalizes rent. There’s a fairness to it,” he said. “And I do believe that when rents start to move, tenants will once again say, I want longer versus shorter because they don’t want to get caught with a higher rent. So this is just supply-demand pricing. And I think once there’s equilibrium, we’ll see that the tenant market isn’t that distorted relative to term.”
Large office tenants were shortening lease terms even before the pandemic in cities like New York and San Francisco, and COVID-19 ushered in a new era of hub-and-spoke models as occupiers recalibrated space and staffing needs. CBRE’s 2021 Occupier Survey reported that in the United States, 62% of employers expect to adopt a hybrid schedule with employees going to the office 2.5 days a week. A higher fraction of U.S occupiers expect a contraction of their office space, at 44%, compared to 29% that expect an expansion and 27% that expect no change.