There seems to be something weird going on with the office space market. Stories abound of companies scaling back on office space, but the rental market at least seems stubbornly lofty.
In the other thread I related how a non-profit I’m associated with has been waiting for rents to fall before signing for their new HQ space, but in the last two years none of the suburban office parks have gone down in the rent they are asking.
Similarly my employer moved over 200 people out of a building we rent in 2021. We are trying to sublet on a triple net basis to cover 100% of our cost for the remaining lease term. We’ve had no takers.
I mean, I’m in Finance. I realize that lowering the rent may require that the owner or master lessor to write down the value of the property or take a provision (record expense) but this is just paper loss. Leaving a building vacant for years is a real cash loss, that would take decades to recover even if rents do EVENTUALLY go back up.
Perhaps I misunderstand, but how is this “similarly”? Your preceding example indicated high demand for office space, while this seems to indicate low demand.
The spaces the nonprofit has been eying have been lying vacant since 2020 or earlier, and the prices are not coming down. In most cases they are going up.
Similarly the technology park that we are trying to sublet in has massive vacancies, but we are trying to sublet at the same rent as we did in 2018.
I get a certain vibe of Wile E Coyote having run off the edge of the cliff and he’s now holding out as long as possible before looking down. At which point gravity will take hold with a vengeance.
It’s a copycat industry where rates are what rates were. The first time one major RE management company accepts a slashed rate on a big deal, the bottom will crash out of the market. As long as they can delude themselves that demand will return soon, they’d rather tolerate some vacancy rather than gut their future cashflow for all their still-rented space.
Or so it seems. RE being usually a highly leveraged and also highly profitable business, it may be a case that the first guy who blinks will be bankrupted very quickly. Nobody wants to be first. Better to run at a much reduced profit or even a small loss for a while rather than whip out your sword and fall on it.
Commercial leases are at a fixed rate for 10ish years or so so landlords are trying to make a bet on what the market rate rent will be 5ish years from now. Most landlords are betting that WFH will substantially diminish and Amazon announcing a RTW policy this week and being one of the last majors to do so means it seems like they are correct.
A landlord that signs a lease in year 1 makes $10,000 of rent over 10 years, a landlord that waits until year 4 makes $24,000 of rent despite leaving the office empty for 3 years.
Yeah, that sounds right to me. Landlords are hoping work-from-home is temporary.
In some places office space is being converted into infill apartments. That might be quite lucrative - at least more lucrative than signing a 10-year lease for what might be below market rent in a short time.
There is a considerable cost of “fitting up” office space that makes shorter term leases quite impractical. It’s not uncommon for the fit-up to cost a years rent.
Those are sub-leases where a company outgrows their office so they offer the remainder of their term at closer to market rates or co-working spaces that split a long term lease into lots of very short term leases.
The reason why the original leaser doesn’t offer it is because of the aforementioned renovation costs which only make sense when split across a long enough period of time.
It’s not office space, but here in town we had a couple of very popular restaurants at a busy intersection that both shut down about four or five years ago. The story was that the buildings’ owners jacked up the rent when it was time to renew the lease, and both restaurants pulled out rather than pay the higher rent. One building has been vacant ever since and the adjacent one had another restaurant open but only lasted about a year or so. It just seemed like a real bonehead move to force the businesses out and get nothing, rather than a steady flow of less-than-desirable rent.
I have wondered about this. Does a building owner get some benefit from an empty commercial building, like some tax credit? That would offset the loss of rent, and put into play some sort of minimum rent level.
I think @Shalmanese is mostly correct. The landlord has a vested interest in holding out for the maximum lease, especially in a hot market or prime location. If they have a large portfolio of properties, most of which are occupied at high lease rates, then the carrying costs of unoccupied spaces is just a blip on their balance sheet. Unrealized potential revenue is not the same as lost revenue in this case.
geniune Q: impractical for whom? … the landlord or the leaser? who would pay the fitting up cost? and what do they comprise (painting, new carpets an such?)
While mostly unheard of in residential leasing, commercial landlords often pay for a good chunk of building out the tenant space. Things like offices, conference rooms, kitchenettes, and bathrooms. It can be just paint, carpet, and lighting, but it can also be a lot more than that. After all, the tenant can’t really take much of it with them when they leave, so the landlord has a decent stake in it.
I’ve been doing involved in a dozen or more office moves, from a few thousand square feet to hundreds of thousands. Most times the new tenant wants every internal partition moved. And the landlord agrees to do that work.
Heck we spend millions every 10 years or do reconfiguring our existing space. About 8 years ago we flipped from offices on the outside (with windows) and cubes on the inside, to offices on the inside (around the central tower of elevators, restrooms and utilities) and the open floor plan for the peons on the perimeter with more natural light. The total renovation cost was more than a years rent would be for the building (though we own it).
Because many companies are locked into leases for a number of years, it might be a while before the full impact of employees working from home is felt. My employer has a large amount of space it leased many years ago that it can’t get out of and can’t find anyone to sublet. I don’t know if the building managers are going to have any more luck renting that space once we’re out of it.
I don’t believe working from home is going away. In fact, I expect WFH to become more the norm for many office workers as the years roll on my. When my company required workers to return to the office in 2021, there was practically a mutiny with turnover going through the roof before management decided to reverse the policy so we would stop hemorraging employees. Working from home was essentailly a raise for me as I no longer had the expense of commuting, I didn’t have to buy as many clothes, and I ate out far less often. I’ve company A wants me to work in the office, it might be worth my time to go work for company B who allows me to work from home even if they pay me less because I end up taking home more. And that doesn’t even count the additional benefits like all the extra time I have not commuting.
You may have seen articles saying the Manhattan is losing $12 billion a year due to office workers working from home. These folks aren’t coming into Manhattan and eating at restaurants, paying for parking, etc., etc. In addition to office space, a lot of businesses that support officer workers have been feeling the crunch. It’s going to be interesting to see what happens.
I used to wonder why landowners of commercial properties would leave a building vacant for years. Saw this all the time on the Big Island of Hawaii (but only on the slow Hilo side, never on the busier Kona side).
They are basically land banking the properties. In the meantime, all they have to do is pay the property taxes. If there is a lessee in the building, they need to pay for expensive liability insurance. As land prices are seemingly always going up, as is the population, it would seem a sure thing that the longer you held it, the more you could ask for it.
Don’t forget the inside track thing too. If I’m buddies w/ someone on a planning commission and know that there is a project coming that might bring a lot of development, I will just sit on the property. If my inside track says that area is in danger of eminent domain, I will dump it to the highest bidder. When I say I, I mean them. I’m too honest to get involved in this stuff, it will all come back to anyone that does it. Cause and effect.