Garnet Capital Advisors Blog

Leasing Showing Renewed Signs of Life

Though each emerging variant keeps pushing back full return to office dates for many big companies, leasing data indicates companies continue to prepare for the day and do not expect too much cutback from work-at-home demands.

Wealth Management.com reported the findings from commercial real estate services firm Savills, noting office leasing in major markets in 2021's fourth quarter was up 89 percent over the fourth quarter of 2020.

Despite fears that working from home would become popular with tech workers, Big Tech actually has been leading the pack in adding office space. Tech companies have added 9 million square feet of office space during the pandemic.

Meta Platforms (formerly Facebook) recorded the largest commercial space lease in the last quarter, snagging 598,112 square feet in Austin's Sixth and Guadalupe office tower under construction. Other tech firms that added significant space in 2021 included Amazon, Apple, Hulu, Microsoft, HubSpot, Riot Games, and Activision/Blizzard.

Growth has been spread across the country. Manhattan saw the largest increase in the fourth quarter, with 9.3 million square feet of new leases. San Francisco bounced back after being hard-hit during the pandemic, with a 400 percent increase in leasing activity. Other major markets, such as Boston, Dallas, and Los Angeles, saw significant increases, but so did second-tier, tech-friendly cities, such as Austin, Salt Lake City, and Nashville.

What Companies Are Looking for

Higher-end buildings and newer construction or recent renovations are drawing the bulk of the new business in 2021. And much of it is a new business, as 18 of the 20 top leases signed in the fourth quarter were for new space over renewals.

Predictions of an exodus from downtowns to the suburbs don't seem to be panning out, as most of the largest leases are for downtown spaces.

Property owners also are seeing a mixed bag of uses thus far, with some companies expanding to spread workers farther apart and to offer larger common areas and collaboration spaces, while some companies have contracted as workers using a hybrid schedule will be sharing more spaces.

One trend that might hold is that tenants are seeking greater flexibility through shorter lease terms. While the traditional average has hung around the 8.5 to 9.5-year range, that number plummeted to 6.7 years during the pandemic. Some 10-plus year leases signed in 2021 have pushed that number back up to 7.9 years, but many analysts expect it to remain lower than traditionally.

Rents generally are remaining stable through the pandemic, with Class-A office space averaging $52.40 per square foot in Central Business Districts and $34.20 per square foot in the suburbs. Landlords are offering concessions to keep tenants happy, meaning effective rents for class-A spaces in downtowns are off 7.1 percent below pre-pandemic levels, but that's bounced back from being down 18.9 percent in 2020.

What the Numbers Mean for Lenders

These numbers should take some of the stress off lenders as many of the gloom-and-doom predictions for the office space market during the early days of work-at-home necessities have not panned out. Companies appear ready to call workers back to the office and might even offer great amenities and more space when they do. While lenders have less concern about defaults, the current environment presents a great opportunity to reduce concentrations and manage portfolio risk by selling loans secured by office collateral, without the need to incur significant price discounts. Garnet can help you customize a portfolio to maximize price while achieving your risk-reduction objectives. Contact us today to learn how we can line up buyers for your office-collateral loans.