April 21, 2021
What am I missing? It is a question that I am getting a lot these days from our clients and prospects. And it’s pertaining to the office rental rates not really going down as much as they feel like they should be going down. And yes, conventional wisdom would tell us that there’s only 20 to 30 percent of these building occupants that are back into the office, so surely if I’m a tenant that’s willing to sign a 3, 5 or 7 year lease, I’m going to get the steal of a deal, the deal of the century because I’m willing to move forward and go ahead and sign up for a long-term commitment. And unfortunately, right now that just is not the case. One, the ownerships have not really felt the pinch of the pandemic yet. They haven’t had enough office leases that have expired in their buildings. And then having those leases not be filled with tenants coming in to really drive rental rates down yet. Now six to twelve months from now, that may be a different story. We just don’t know. I think the biggest question mark we have is, what will demand for office space be going forward? You know, a lot of big corporate real estate shops like CBRE are predicting that there’s going to be at least a 10% drop in office demand. I mean, 10%, 15%, whatever the case, that is a cataclysmic drop in demand for space, especially when you start to uncover the layers of the types of loans or mortgages that are on these big office buildings. So once we see that, I do believe the rental rates will start to drop significantly if demand truly does drop 10 to 15 percent for office space. But until then, we’re just going to see a slow trickle of a drop of rental rates. But what we will see, is an increase in tenant improvement allowance, and free rent and other concessions, because throughout the times of history when there has been a recession, asset managers have been taught to hold firm on the rental rate, but give up a lot of concessions. Because at the end of the day, owners make their money when they sell these office buildings, and you sell for a higher price on the office buildings when the rental rates are artificially inflated, because they gave up so much concessions on the front end.