Record Office Lease Expirations Loom, Forcing Companies to Set Footprints

Leases for 243 million square feet of office space are due to expire this year, the largest amount to hit the market since JLL began tracking expirations in 2015, forcing companies to decide on their office footprints while trying to anticipate how many workers ultimately will return to the office.

The deluge of expirations, nearly 11 percent of the overall office space in the US, has building owners—and banks holding their loans—sweating out a reckoning that did not occur during the worst part of the pandemic, when people chose to work from home and offices emptied, due to long-term leases that forced tenants to continue paying office rents.

Also, many office tenants whose long-term leases expired during the past two years negotiated one- or two-year extensions with landlords so they could wait out the pandemic without having to make tough choices about office footprints, according to a report in The Wall Street Journal.

Brokers are reporting that a growing number of tenants now are deciding to shrink their office footprints in new leases because they’ve adopted hybrid strategies for their workers as a compromise between remote work and return-to-office edits, WSJ said.

The wave of office lease expirations this year represents a 40% increase since 2018. CRE analytics firm Green Street is projecting that companies opting for hybrid work models will cause a 15% drop in the demand for office space, the WSJ report said. 

Because building expenses generally are fixed, even a small reduction in leasing revenue can lead to a large drop in profits and a larger reduction in a building’s overall value, the report noted.

The trend toward smaller office footprints already is roiling the market for CMBS loans.

According to a report from Barclay’s, In February 21.2% of loans packaged by lenders into commercial mortgage-backed securities backed by office buildings and were placed on default watch lists, the highest level since a wave of defaults in 2010 after the global financial crisis that was spawned by over-leveraged bundles of sub-prime CMBS peddled by Wall Street investment banks.

About $1.1 trillion worth of loans backed by office buildings are outstanding, with about $320 billion of those loans maturing this year and next, according to data compiled by Trepp Inc.

Companies with leases expiring soon have to make their office space decisions in a fog of uncertainty over whether the momentum of the return-to-office push is slowing down.

More than half of the workforce has yet to return to the office, according to Kastle Systems’ Back to Work Barometer, a weekly analysis of card-key entry swipes by office workers in 10 cities.

Kastle’s barometer reported that the average occupancy leveled off after surging from 39.5% to 42% during the last two weeks of March. The barometer report issued on April 6 reported a gain of slightly more than 1 percent, to 43.1 percent.

Kastle said three markets in Texas—Austin, Houston and Dallas—topped the return-to-work leaderboard, at 61.7%, 55.5% and 50%, respectively, but none recorded gains of more than 1.4% percent in the April 6 report, with Dallas actually dropping by 0.5% during that period.