Is the return to the office happening faster than expected? If so, what’s the impact on landlords, tenants and investors? On today’s podcast, hear Bob & Jan discuss this possibility and possible ramifications.
It seems that most return to the office announcements were expected to take place either July 1 or after Labor Day. But some people say it’s happening faster than expected with many companies, including large institutional lenders, having their employees roll back in this summer. While I don’t see it widespread, I do agree that there is a lot of talk about having employees return to the office sooner. We certainly have clients doing so and we’ve seen announcements from large companies like JP Morgan and Google which have moved up their return to work dates to mid summer.
This is likely due to a faster than expected vaccine roll out and removal of city and state restrictions….at least that’s the analysis in WealthManagement.com article. It’s definitely been a bumpy ride, but they quoted a CBRE survey that shows companies returning to a more normal occupancy throughout 2021.
I just don’t think anyone knows what “normal” will look like in the future. I saw a headline a few weeks ago that said there’s a study to support whatever opinion you have about the future. A JLL broker was quoted in the WealthManagement.com article saying that talk “of dramatically reducing office space has softened in recent months”. That’s anecdotal. I’m not sure the market data would support that position.
Texas cities have had a higher percentage of employees back to the office throughout the pandemic. The Kastle Systems Back-to-Work Barometer has Dallas still at the top with Houston and Austin close behind. It’s been that way the whole time and remains so. But the increase in the last 3-4 months hasn’t been that much – maybe only a 3-5% increase. The top 10 markets in the country for Kastle averages only around 29% at the end of May which is up only a couple percentage points. So, what does all this mean for landlords and tenants? It remains a tenant’s market in the office buildings and likely will stay that way for the foreseeable future. But I am seeing landlords getting more confident and pulling back on how aggressively they have been negotiating up to now.
Which leads me to say that I am now changing our recommendations on how tenants should negotiate. Up to now, I’ve been saying that tenants should do 12-18 month extensions if no significant improvements are necessary because rental rates were likely to go down. I’m not as confident of that now. I don’t see tenants getting hurt by doing short-term extensions, but I’m not convinced that rental rates will be lower. Also, construction costs have been going up so rapidly that any savings in rental rates that might be achieved could be more than offset by those. I am seeing landlords pulling back on the amount they are willing to spend on TIs.
How will all this return to work talk affect investors? Our clients aren’t investor/landlords, so I don’t have first hand knowledge to answer this question. From what I read though, office buildings are still selling although total sales volume was down 48% for the year ending in March according to Real Capital Analytics. RCA has a couple of indices that track prices and those were nominally lower for downtown buildings and up 2.2% for suburban buildings. That would indicate greater investor confidence that suburban buildings will be more stable and in greater demand in the future, but the virtually unchanged downtown index is impressive.
Buyers always prize stability of occupancy and cash flow. What’s amazing is that investment sales brokers report that sales pricing really hasn’t gone down. This can only mean that despite short term occupancy uncertainty, investors must be underwriting acquisitions assuming that companies will return to their same square footage or even expand. I suspect this also means that only highly occupied buildings are coming to market right now and could also mean that there is more money sitting on the sidelines waiting for deals than there are good deals to be had. I seriously doubt few landlords are trying to sell their buildings with high vacancy.
The WealthManagement.com article said financial services and banking institutions are targeting summer returns while tech companies are going more slowly and incrementally. I suspect that has a lot to do with the technology sector still being extremely competitive when it comes to hiring and trying to find ways to expand their potential employee base. There are a lot more people to choose from when you don’t require them to move to San Francisco.
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.