The office market is decidedly in favor of tenants these days but negotiations over lease terms and tenant requirements have a bit of nuance.
Landlords are hard pressed to retain tenants as the threat of trillions in commercial real estate-backed loans set to mature in the coming years looms large, and values on office properties are taking a hit in the wake of rising vacancy, weak demand and higher interest rates.
“It’s been a really strong landlord’s market, quite frankly,” said Dallas Smith, founder and CEO of Atlanta-based commercial real estate firm T. Dallas Smith & Co. said, referring to pre-pandemic years. “If there’s a silver lining, this is really a good turn for tenants … This is a good time for them to pull out all the stops.”
Still, even though space deals can be found right now, office demand has tapered off as more companies embrace remote or hybrid models, relocate and likely downsize into higher-quality space, or defer any major real estate decisions until the economy strengthens.
A recent survey by commercial real estate technology platform VTS Inc. found 51% of office landlords reported their daily occupancy rates are below 30%. Perhaps unsurprisingly, 87% reported tenant retention as a top priority for 2023, although 41% said they weren’t sure they had insight into upcoming renewals of tenants at risk of leaving, and 22% reported they didn’t have visibility into tenants at risk of economic failure that may be unable to renew their lease.