Vacancy Puts Tenants in the Drivers Seat for Next Five Years

Glut of office space due to Covid has given tenants out-sized leverage in the leasing game

by Michael A. Mora in on June 30, 2020

A global real estate firm is expecting an office market that will heavily favor tenants within the upcoming three to five years due to vacancy brought by the previous landlord driven market and the coronavirus pandemic.

Vestian, a full-service real estate firm focused on occupiers, said in this new era, there will need to be a focus on the total work plan that is outside the traditional office space market. Right now, businesses have around 30% to 50% more space than they need.

Before the coronavirus, brokers did not take into account that many businesses were practicing remote work. Instead, brokers formed space solutions for clients that had expensive, long-term and inflexible leases in cool trendy workplaces, according to Vestian.

It may take five years for market to recover pre-covid occupancy

These office spaces were justified because they would help secure top talent while elevating the business image. But amid the coronavirus pandemic, landlords are no longer driving the market. As a result, brokers are not obtaining incentivized high payouts that came with appeasing a landlord’s increasingly soaring asking price.

“Rather than thinking about real estate solutions as a whole, brokers were solely focused on leasing the physical space,” said Michael Silver, chairman of Vestian. “The result is market opportunities for tenants not seen in 30 years with millions of square feet of office space becoming available as businesses shrink their footprint.”

Right now, businesses have around 30% to 50% more space than they need.

Silver stated that Class-A office space would have the steepest recovery because of the coronavirus’s effects on the previous business model. Before the coronavirus, direct vacancy was around 10% in the top metropolitan areas.

As shadow space and new construction come onto the market in the upcoming months, Silver projected availability to rise to the 15% range in top markets. While manageable, office space availability could drive towards the 20% range as leases both expire and are not renewed, and footprints are being scaled down. But Silver said it could get worse, as about 5% of recently leased space will no longer be needed, driving availability to around 25% or more.

The best way to hedge against this new normal is to develop a new business plan based upon projected conditions and new revenue opportunities. Silver also recommended securing new spaces at discounted rates within four to six months. He stated tenants could secure space at a “30% discount, with lease terms of 5 years or less.”