Armano February 2022 Newsletter
Office Asking Rents Increasing in Mostly Unoccupied Buildings?
The NYC office market strengthened in the fourth quarter of 2021 as demand totaled 9.1 million square feet of space, up from 20.8% in the prior quarter. This was higher than the pre-pandemic average of 9.0 million.
Market availability measured 18.6% at the end of the fourth quarter. This was 20 basis points higher than the prior quarter and 710 basis points higher than pre-pandemic levels. Thus, a supply demand imbalance exists.
However, in a positive sign, the amount of sublet space on the market decreased by 11.7% in the fourthquarter of 2021 since peaking in the first quarter of 2021. Moreover, asking rents increased 1.3% in the fourth quarter of 2021. Thus, asking rents appear to have bottomed and are now 9.4% below their pre-pandemic peak.
Physical post-pandemic office key card usage peaked at 37% on December 1, 2021, according to Kastle Systems. However, the Omnicron variant has had a measurable effect in lowering building usage over the past couple of months. Usage rates measured 23.3% on 1/26/2022 and 25.8% on 2/2/2022 respectively. Thus, the market appears in a post-Omnicron recovery phase.
We are seeing a resurgence in offices space demand at Armano Real Estate as Omnicron recedes. Tenants that temporarily delayed their space plans are moving forward again. Moreover, after two years of COVID related delays and uncertainty, many tenants have completed their space planning diligence and are ready to commit to longer term leases to take advantage of the weak market which affords lower rents and greater landlord incentives.
Tenants often ask us how it is possible that asking rents are increasing as buildings remain mostly empty. Let us rephrase. How is it that rents are increasing in a market with a demand supply imbalance? We will try to explain.
First, we are making this comparison using post-pandemic asking rents so that our explanation covers this COVID period. Asking rents, the asking price per rentable square foot (RSF) for space have increased over the last few months. It would also appear that taking rents, the actual transaction price per RSF, have also increased.
However, during this COVID period the amount of landlord concessions has also increased and continues to increase. Landlords are offering more in the form of free rent and tenant buildout concessions. Thus, net effective rents, taking the full value of all aspects of a lease, are not increasing. Asking rents may recently be increasing, but this is not necessarily the case of net effective rents which take landlord concessions into consideration.
This qualification for net effective rent aside, we would further clarify that we believe that net effective rents also appear to have bottomed and/or will bottom shortly. We expect this to be the case despite lingering over supply and buildings operating at significantly below average usage. The reasons for this phenomenon are two-fold and must be understood from the building owner’s perspective.
First, the building owner is currently faced with increases in operating expenses such as energy and security systems. The rising costs due to inflation put a floor on what is acceptable as a taking rent. Secondly, the building owner may opt to decline renting space at low rents now because it makes more sense to forego a low rent lease in favor of a higher rent lease in the future. Thus, rising costs and expectations of higher future rents are both very sound and economically driven reasons for a landlord’s refusing to accept a tenant offering a low rent and opting instead to keep the space vacant.
Finally, just because a space is currently empty does not mean that it has no activity. Tenants are forward looking and are signing long term leases for space they will not use now but intend to fill. An empty space today may very well be a space that has a deal closed or pending.
We, therefore, encourage tenants to proactively use this window of opportunity to engage the market and explore options to best reposition their corporate real estate.
Please feel free to contact us regarding your current real estate situation. We can provide a no-fee lease review and analysis and a preliminary space program to help meet your back to work plan and corporate real estate vision. Please see the below link for recent news announcements and our newsletters:
Please see the below links for NYC recovery index:
NYC Economic Recovery Index
Please see the below links for NYC COVID results:
Positive COVID-19 Results by Region
Please see the following link regarding HealthCheck360 COVID-19 Workplace Solutions:
