We’re now nearly 9 months into the COVID recession and I’m amazed at how many landlords continue to quote the same rental rate they were before this started. We received several proposals for an office client recently and many didn’t come off their quoted rate at all. In two cases, the offered rental rate was actually higher than what is being quoted in CoStar.
Insanity!
But a couple got really aggressive. In another transaction searching in high-end buildings far north, one landlord got so aggressive that it got fairly close to what a sublease in the same project would cost.
An analysis of CoStar data today shows that the market-wide average rental rate being quoted for direct leases in office buildings is $27.76 while it’s only $23.47 for subleases. That’s a $4.29 (15.5%) savings for subleases before any negotiation. We typically see a greater range of negotiation for subleases than direct leases.
Sublease availability stands flat at 9.2 million square feet so it hasn’t gone up in the last couple of months. That’s a good sign.
CoStar says total vacancy stands at 16.7% currently and is predicted to rise a bit more to 17.15% by the end of the year and remaining there through the end of 2021. I think that’s a very conservative forecast.
As I talk with other tenant reps throughout the country, most of them are reporting very slow activity and clients that are either downsizing or totally closing offices. And this isn’t just local companies. One person told me that a large insurance company with locations throughout the country is not planning to extend leases that will expire in the next year and will also be closing other offices and make them available for sublease.
All of this points to a continued softening of rents – meaning they will likely continue to go down. As landlords fight for the few deals out there, compete with subleases, and see their occupancies fall due to non-renewals and renewals with less square footage, they will get more aggressive. Maybe not the ones with high occupancy rates and high-credit tenants with longer-term leases, but others will. What we are seeing currently is more free rent and tenant improvements being offered as landlords want to preserve their asking base rent.
My recommendation is still to do short-term leases (12-18 months) if you lease expires between now and 2nd quarter 2021. If the lease expires beyond that, don’t do anything yet if you can wait.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.