Will Someone Please Tell Me What’s Going on Around Here?

Will someone please tell me what’s going on around here. A long-time real estate industry friend used to say that whenever she wanted to better understand the local commercial real estate markets. And over the past several months, trying to figure what’s going on has been a bit of a challenge.

There’s lots of empirical evidence of weak real estate market conditions, and a good bit of anecdotal evidence. And a particularly large amount of ‘to be determined’ going on. There’s some empirical evidence we all read. The amount of sublease space on the market is finally increasing. It’s 30-50% of the total space available in some submarkets. The industrial market is fairing much better than office and retail, with rents increasing in industrial by 1-5% in many submarkets.

We decided to put together some of the anecdotal evidence we are seeing or hearing into this bullet point format. These are based on the main West Coast Office markets where we serve clients:

  • Rent Relief and Deferral, and Landlord Concessions. There are many situations where landlords are working with tenants to provide rent relief or rent deferral, or some other concession. And many situations where landlords just aren’t willing to make any concession. It’s not predictable who will and who won’t. And can vary between cities like San Francisco, Portland and Seattle. You have to ask to get it, and it could be too late to get.
  • Giving Back Space. We have had a few interesting concessions given. One office client was able to give back a portion of their space that the landlord needed. In exchange the landlord gave them a newer base year. A quantifiable savings on operating expenses.
  • Tough to Terminate. Most tenants are not finding ways to terminate their leases. Nor are they typically able to give back space to their landlord. And neighboring tenants aren’t typically expanding.
  • Slow to Put Space on the Sublease Market. It’s starting to change. But for the first 6 months of the pandemic, not as many companies actually put sublease space on the market. At least not as many as you would expect. We think it’s because they probably didn’t want to write down a loss if their business was as profitable as it was before Covid-19. They just keep paying rent on vacant space, and everyone is working from home-and relatively happy. Zero-sum.
  • Not Sure What Action to Take. Another reason for a sluggish supply of sublease inventory might have been the uncertainty of all this. For instance, if a company is paying for space, not using it, and workers are at home working, they probably will leave well enough alone. Who wants to make the decision to not renew or not have an office, and then a vaccine solves everything?
  • No Demand. Few companies are actually looking for space. Listing brokers have told me they are bored. It’s safe to say most office markets on the West Coast are frozen.
  • Skip the Office. When some tenants in ‘work-at-home’ conditions have their lease coming up for renewal, they contemplate not renewing. Going office-less. Operating without an office, while looking into daily, weekly or monthly meeting spaces instead. Many choose to renew “as is” for 6-12 months to see what happens with the virus. Some go office-less. We have had clients who plan to skip the office.

Other Discussion Points We Hear:

  • Employees and companies want more room for distancing. They want suburban space, parks, gardens, etc.
  • Quoting Eddie Albert’s and Eva Gabor’s give-and-take in the Green Acres theme song (1960s TV):

Eddie: “The chores.”
Eva: “The stores.”
Eddie: “Fresh air.”
Eva: “Times Square.”

  • High-rises and their elevators could be in trouble to some extent, virus or vaccine. Picture an elevator lobby in a 50-story building at 8am and 5pm. No one has a good answer to this and everyone knows it will be a big problem.
  • Empty ground floor retail, without retail tenants to lease it, could be a good office alternative. Starting to hear about this. It makes sense.
  • High ceiling, air conditioned, warehouses used as offices, even with 2/1000 car parking might work for office tenants in the next cycle.
  • No one is really sure if people will come back to their office spaces. But they probably won’t be close together. Not sure companies will want to lease bigger spaces to create room vs. send a few more employees into the remote world. But we really don’t see a net increase in total square footage leased because of distancing. We think remote working will offset the new demand.
  • Many office landlords and their brokers are thinking, “This will all pass and everything will go back the way it was.” We think they are overly optimistic. Consequently, asking rates are going down a little, like single digits on Class A direct space. Not a lot. But we are finding sublease in the same buildings at discounts as big as 50%.
  • Commercial real estate brokerage offices are a tale of two divisions. Office brokers are twiddling their thumbs with nothing to do. Industrial brokers are getting 2 to 3 times as many space requests as they did pre-pandemic.

One thing that is going on around here. We don’t recall a time in the past 30 years where everyone in business, but not in commercial real estate, knew so much about commercial real estate conditions.