Negotiate Office Rent Amidst the COVID-19 Pandemic

When Is The Best Time To Negotiate Office Rent Amidst the COVID-19 Pandemic?


USA – New research from Cushman & Wakefield (C&W) revealed that prior recessions – the Dot-com bubble in the late 1990s and the 2008 Global Financial Crisis – have shown that asking rents of office space across the country didn’t fall until 4 quarters after vacancy level started to increase.

Specifically, most office rental markets hit rock-bottom 14 to 16 quarters after the start of a downturn, however some markets reached their trough earlier than that.

The property consultancy reckons that the same trend is again happening in the US office market, as overall office rents and asking rents of Grade A office space increased by 5.6 percent and 3.8 percent respectively on an annual basis in Q4 2020, and ended the year at all-time highs.

At the same time, office vacancy across the country edged by 257 basis points, while that for Grade A office space increased by 273 basis points as compared to the same period in 2019. Interestingly, the same trend happened in Canada.

“While the timeline of rent declines varies by market, the pattern is consistent. However, the depth of the pattern can vary widely,” noted C&W, explaining that the variance among the top 10 most volatile office markets in North America has historically been 9 times that of the 10 least volatile markets.

Still, getting the right timing to re-enter the market or renegotiate rent at more volatile office locations offer substantial benefits for tenants. For instance, rental declines in gateway markets that have higher asking rents than the national average were greater by 2-fold versus secondary and tertiary markets based on historical data.

But for the latest recession due to the COVID-19 pandemic, companies that want to re-enter the market or renegotiate their lease during a specific market’s “Sweet Spot” – when at least 75 percent of the peak-to-trough drop has happened – should move more quickly than in the 2 prior recessions as the current downturn has resulted in unprecedented job losses.

As such, C&W believes that that many office markets will see precipitous rental drops. And strategy, planning, and action this year is crucial to take advantage of that. However, the real estate consultancy cautioned that timing the bottom is difficult.

“While not universally true, CBDs have historically experienced larger declines in rent and have taken longer to hit their rental trough than suburban submarkets. With 42 percent of CBD submarkets not hitting their respective rent bottoms in the first 10 quarters after peaking, they are twice as likely to take at least 11 quarters to bottom out than suburban submarkets (42 percent versus 19 percent of non-CBD submarkets).”

“This patience can be well worth it as CBD rents for the 11 slowest markets to hit rent troughs decrease by an average of 402 basis points more than the 11 quickest CBD markets,” added C&W.


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