US Office Market Shifts To Tenants’ Favour
USA – While asking rents across the country showed a marginal drop, it has become a tenant’s market as landlords are offering rental concessions, such as “free rent” periods and furnished office space, in a bid to attract occupants, reported GlobeSt on Wednesday evening (24 August, SGT).
In the 2nd quarter, asking rents of Grade A full-service office space slid by 0.4 percent to US$41.05 psf.
“While we have not seen asking rents diminish (significantly), we have seen landlords and tenants increasingly agree instead to various rent concessions,” shared Cristina T. Sanchez, property lawyer at Duane Morris.
Examples of these rental concessions include offering free rent periods at the onset of the lease terms and improvement allowances for lessees. These concessions reduce the ‘effective rent’ for tenants, while enabling the landlord to achieve its asking rent. It may also be helpful with any potential financing.
“Asking rents are stabilizing because landlords are keeping asking rents higher but are offering increased concession packages for tenants. Free rent and more tenant improvement dollars, that can also be converted to free rent, help offset a higher starting rent for the tenant.” This trend has occurred in the two downturns, noted Petra Durnin, Head of market analytics at Raise Commercial Real Estate.
“Also, the flight to quality is placing a higher demand on Class A space, which keeps asking rents at a premium. As companies implement hybrid workplace strategies, a highly amenitised, custom workplace is necessary to attract and retain quality talent and facilitate in-person collaboration.”
Meanwhile, data published by Colliers in August showed that office absorption improved from negative 500,000 sq ft in the 1st quarter to 3.1 million sq ft in Q2 2022.
However, data from global commercial property data platform Coyote Software showed that office vacancy level rose to about 15 percent during the quarter under review, although it’s still under the record peak of 16.3 percent during the 2008 Global Financial Crisis.
“That means it’s a tenants’ market right now, and so it’s hardly surprising that owners are having to keep rents palatable and offer concessions if they want to see their buildings full,” added Coyote Software’s Chief Revenue Officer David Oates.