The office sector is coming out of a major shock, having gone from booming demand for new space at the end of 2019 to the current state in which companies are meticulously reevaluating their real estate needs.
As California is re-opening, many office environments are slowly returning to normal. Leasing activity for the first half of the year is up substantially but an excess of sublease remains on the market and vacancies are well above the historical average. Low occupancy has resulted in falling rents, hitting the high-end of the market the hardest, and investors have mostly remained on the sidelines since the end of last year. Recent notable transactions in the OC office market included redevelopment plays and a medical office building.
“Flexible”, “Agile” and “Hybrid” workplaces are front and center in both tenant and landlord circles. One thing is certain—it is highly nuanced and there is no single solution. Every transaction is very company-specific and very industry-specific. We are going to see minimal impact among some sectors like the legal industry, financial services and wealth management. The degree to which companies are coming back to “kick the tires” and consider their options before signing leases is significant.
On the other hand, office users planning to reduce or even do away with a physical location entirely are not able to flip a switch and make that happen overnight because many leases are still running for another 3-10 years.
The biggest challenge is where rents are going as many companies are looking to significantly reduce their space requirements based on increased flexibility for their workforce. The two, however, are not necessarily, and in every instance, correlated. Instead of justifying getting rid of much or even all of their office space, tenants may do better to reimagine how they utilize space and create an environment that benefits their people, productivity and culture. Landlords that help their tenants execute this vision will differentiate themselves and will have more tenants willing to pay a premium. For example, in a recent Pipeline article, the Irvine Company disclosed that from April 2020-March 2021, more than 200 companies expanded, renewed or signed new leases throughout their portfolio, totaling more than 6.7 million square feet. Many business-owners say the workplace is more important than ever when it comes to fostering collaboration, innovation and productivity. A healthy and vibrant workplace community helps innovative companies create a winning culture and contributes significantly to growth, success and employee satisfaction.
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