The uncertainty of whether workers will ever return to the office en masse and on a full-time basis has many organizations in the U.S. rethinking the future of their real-estate footprint.
For some, rethinking means reducing.
JPMorgan, Ford, Target, Twitter and PricewaterhouseCoopers are among major corporations trimming or subleasing their offices space in the wake of the coronavirus pandemic. That’s because they’ve determined that the future of work likely will entail employees working remotely at least partially even after the health crisis subsides.
Such moves by businesses to hedge their real-estate bets amid a cloudy office outlook have resulted in a glut of office space available for subleasing, and real-estate experts say the trend will only grow.
“There’s no doubt about it — that’s the new normal,” said Ian Anderson, senior director of research and analysis at CBRE, the world’s largest commercial real-estate-services firm. “Tenants are giving back space in their office. Some small companies who were toward the end of their lease terms have simply vacated their offices and said ‘we’re not coming back.’”
Office markets in New York and San Francisco have been hit hard by the shift to remote work. CBRE estimates the office vacancy rate in Midtown Manhattan rose to 12.1 percent as of February 2021 from 7.8 percent a year earlier. San Francisco’s vacancy rate climbed 2.8 percent in the first quarter of this year to a record 19.7 percent.
No definite return to the office
To be sure, the unprecedented disruption of Covid-19 has altered the perception of work for companies and employees alike, “and that includes where work happens,” said Peter Miscovich, managing director of Strategy + Innovation for JLL, a Chicago-based commercial real-estate-services company. “Work from home has given way to a desire to work from anywhere.”
In JLL’s “Shaping the future of work for a better world” report released in January 2021, about 66 percent of employees surveyed said they expect to be able to work from any location they choose once Covid-19 has subsided.
“Yet 74 percent of employees still want the ability to come into an office at least a few days per week, to socialize, engage with management and collaborate across teams,” Miscovich said.
Avison Young, a commercial real-estate-services company, says businesses currently don’t appear overly eager to bring back workers to the office.
“Since the onset of the pandemic, U.S. office using tenants have undergone a massive shift to working remote,” the company said in a report. “Most workers continue to do so even though many cities have eased restrictions and allowed for tenants to reoccupy space. By some estimates, only about a quarter have returned to the office, and many companies have allowed for such flexibility going well into 2021.”
That sentiment was seconded by CBRE, which found in a January 2021 survey that almost half of businesses have no definite plans to return to the office and don’t feel any urgency to rush the process.
Such corporate sentiment is spurring companies to offer up unneeded space for subleasing.
CBRE estimated in July 2020 that the amount of space being in the U.S. offered for sublease in the top 10 office markets rose 12 percent since the pandemic started in earnest last March. Boston, Los Angeles, Atlanta and Denver all posted double-digit percentage gains in the amount of available sublease space, CBRE said.
Tenants become ‘belle of the ball’
For lessors and lessees, subleasing can be a savvy cost-savings move.
Subleased space typically is available at a 25 percent discount to the posted rent. In addition, sublessors are also willing to rent for shorter periods than property owners, who typically like to sign tenants for periods of five to 10 years. There are practical considerations as well.
Subleasing office space is more cost-effective for an office renter than breaking a lease, paying the landlord fees and facing a security-deposit loss.
Entrepreneurs, freelancers, startups and small companies are usually the ones looking to sublease properties because they don’t need or can’t afford to rent an entire office space outright, according to Squarefoot.com, an online commercial real-estate-services platform.
Given the rise in vacancy rates, office owners realize that companies have a lot of leverage right now when it comes to leases and subleases, says Craig Leibowitz, the U.S. executive director for innovation and insight advisory at Avison Young, a commercial real-estate company.
“Tenants have become the belle of the ball, so to speak,” he said. “Landlords are savvy. They know which tenants are actively looking for space, and they’re willing to be creative, to structure a lease to get tenants to absorb their space.”
CBRE’s Anderson echoes Leibowitz’s points.
“A lot of tenants out there think it’s just an absolute field day, and they think they should have their way, no matter what,” Anderson said. “In one sense, it’s kind of true. These market indicators are really poor. Vacancies are extremely high and there’s lots of sublease space.”
Given the uncertainty of office-space utilization in the future, sublease alternatives are becoming attractive options for tenants who don’t necessarily want to make the long-term commitments typically required to lease space directly, Leibowitz said.
“What’s happening across markets is that tenants have become more focused on a return to work, through which they can effectuate a near-, medium- and long-term occupancy strategy,” he added. “And what’s happening is different individuals and future groups, companies, industries and geographies are all being treated differently.”
For organizations considering subleasing office space, Squarefoot.com recommends renters ensure that their rental agreement permits them to sublease.
It also advises them to keep in mind that they liable for any damages to the property, and that while market conditions favor tenants, they still need to do their due diligence.