Office Landlords Will Be Squeezed by Secondhand Market

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Office landlords have fared better than shopping-mall owners during the pandemic so far. However, they may soon be competing with their own tenants as companies sublet space they no longer need.

Asking rents for offices in global hubs like London and New York have been surprisingly stable in 2020, even as many employees continue to work from home. Manhattan rents fell 3% in the third quarter compared with the same period of 2019, while rates for the best locations in the U.K. capital are down by roughly the same amount,


data shows.

Scratch the surface though and these markets are becoming tougher for landlords. Few businesses will commit to a new lease until they understand how remote working will change their real estate needs, so competition for tenants is intensifying. Any company that is willing to sign a 10-year lease in central London today can get up to 28 months rent-free, compared with the 24 months on offer before the pandemic.

Landlords’ next challenge will come from tenants that are beginning to unload space they no longer want. Although companies cannot break leases without reputational damage, they are able to sublease all or part of their offices—an option that both




have used recently.

Plexiglass dividers and floor decals might not be permanent, but the pandemic will bring lasting change to offices. Experts from the architecture and real-estate industries share how they are getting back to work and what offices will look like in the future. Photo: Cesare Salerno for The Wall Street Journal

Rents typically begin to fall when this secondhand supply reaches 30% of total office vacancy, according to property experts at Green Street. Sublet offices are offered at a discount, pressuring landlords to slash rents in the primary market. Subleasing activity is already at this 30% threshold in San Francisco, numbers cited by Green Street show, while tenant-controlled space on offer in Austin, Texas, and Seattle is more than double the rate both cities recorded at the peak of the global financial crisis. So-called grey space is approaching one-fifth of vacant supply in Manhattan.

Across the Atlantic, Britain’s commercial landlords such as Derwent London may be more vulnerable to the trend than peers in Mainland Europe. U.K. office leases are 10 years on average, which encourages tenants to push supply into the grey market during slowdowns. In London, occupier-controlled space already makes up 30% of vacant supply based on Savills analysis.

Not every tenant wants to inherit the previous occupier’s lease terms, and second-hand office space can be poorer quality. But sublets have appeal in a shaky economy. They often come fully fitted out, saving companies the cost of refurbishment. And rents tend to be cheaper than the going rate. In Manhattan, average asking rents for sublet properties are a fifth lower than signing a direct lease based on Colliers International statistics.

Investors in listed office landlords such as Manhattan-focused SL Green and U.K.-based

British Land

should look beyond headline rent figures to get a real idea where the market is heading.

Write to Carol Ryan at

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