Office Leasing: What’s In Store for 2022

November 11, 2021 • As we move through 2021, the office leasing market continues on its fitful journey from the 2020 Covid-induced standstill toward the equilibrium of a still-blurry new normal. As New York State Comptroller Robert DiNapoli noted recently in The Office Sector in New York City, the pandemic erased almost $26B of the market value of New York City's office sector, and the timing of its recovery is an open question.

According to Avison Young’s Manhattan Office Insight Report Q3 2021, the annualized rate of signed office leases during 2020-2021 was 38.6% below the average rate for the prior 20 years. To shed some light on the question of what we can expect in 2022, I conducted a roundup and interviewed a wide variety of in-the-trenches leasing professionals. Here’s a snapshot of the people I spoke with and a summary of what I learned.

Taking Stock: Who’s Still Standing

On a positive note for getting leases over the finish line, the brokers and in-house professionals on the front lines of new transactions in 2021 are the cream of the crop. This makes sense in a market downturn, as those less capable or less motivated seek greener pastures elsewhere.

To gain insight into the likely contours of the 2022 office market, I spoke with many of these front-line experts, including those at brokerage firms, both national and local in scope; as well as in-house specialists, ranging from leasing reps to portfolio managers and C-suite decision makers. All expressed relief that the market is inching toward a greater sense of normalcy, but harbor serious concerns about what the future holds.

The Elephant in the Room

Everyone I interviewed acknowledged lingering uncertainty about how COVID and hybrid work models will impact office occupancy rates in the near term, and overall demand for space in the short, medium and long terms. One institutional asset manager of a northeast portfolio noted, “for every supposed expert claim that tenants’ overall space needs will contract, there’s a claim that demand will increase.” In other words, he thinks the jury is still out. However, the majority of professionals I spoke with were firm in their conviction that overall demand for office space will contract from pre-pandemic levels because most workers will not be coming back to their offices five days a week.

The Amenities War

A senior leasing representative for a Class A office portfolio in New York City lamented about the amenities war in the office sector. “Tenants are no longer satisfied with just a white box office. Instead, they’re looking for amenities and services beyond their four walls that will help attract and retain talent.” She added that those tenants with pricing flexibility are “flocking to new buildings chock full of curated outdoor spaces, gourmet chef-driven grab-and-go kiosks and state-of-the-art fitness centers.” To remain competitive, owners of older buildings have no choice but to preserve the value of their assets by taking advantage of the low cost of capital to invest in new lobbies, conference centers and gyms.

Tenant Flexibility is Essential

Gone are the days when landlords could offer either a 5- or 10-year lease for a finite amount of space. Tenants are demanding flexibility. One office broker noted: “3-, 5- and 7-year lease terms with termination, extension, contraction and expansion options are common.” He went on to explain that this flexibility is one-sided. “Tenants have also been able to torpedo landlord relocation rights” thus limiting landlords’ flexibility to move tenants around, which has long been sacrosanct in leases of less than 10,000 square feet.

Price Discovery

There was widespread agreement that while face rents have recovered from the lows of 2020, especially in new trophy buildings, landlords’ pricing power is still relatively weak. Net effective rents that factor in concessions such as rent-free periods and landlord responsibility for initial fit-out costs, are still lingering at 15-20% below pre-pandemic levels. The president of a privately held regional real estate company shared “in order to get some deals done, we’ve had to agree to build out space for the tenant at a time when even simple build-outs are a killer” due to inflation and supply-chain-induced construction delays.

Getting Leases Over the Finish Line

As with any significant market shift, adaptability is the key to a successful leasing process. With the pendulum solidly in the tenants’ corner, landlords are well advised to adjust their expectations and processes accordingly. During the course of 2021, a remarkable number have been resistant to the time-worn reality that relative bargaining power dictates what can be accomplished in any transaction. As a result, the leasing process has become more arduous and tedious than necessary.

Back to Black

Taking our own advice about adaptability, we adjusted our Black Box strategies to get post-pandemic leases over the finish line in a fraction of the time that otherwise would have been necessary.

Stay tuned for Part 2 of this Office Leasing 2022 series, where we’ll drill down on how we’ve applied these new and improved strategies, and how we intend to get your leases over the finish line.