In addition to an increase in remote work, social distancing and safety precautions, the coronavirus pandemic is leading to an uptick in free office rent and tenant improvement allowances, according to a new study.
The national report by Los Angeles-based commercial real estate firm CBRE found that office landlords are in a more giving mood these days, at least when it comes to granting concessions such as free rent and tenant improvement allowances to obtain new office leases and renewals.
“This means that office tenants can find some advantageous terms in many markets,” said Whitley Collins, CBRE’s global president of occupier advisory and transaction services. “At least until the U.S. economic recovery gains more momentum.”
That’s in part because fewer office deals are closing and because companies are facing new needs — and sometimes less need for space. All this is adding up to concessions that, when taken into account, are the equivalent of lower rent.
Net effective office rent, calculated including the cost of concessions, for the second quarter dropped 6.6 percent in the 15 largest U.S. markets, according to CBRE. Base rent before concessions, however, declined by only 1.1 percent.
The average length of free-rent periods rose to 10 months, or nearly a year, up 13.7 percent from the first quarter. Tenant improvement allowances, money landlords offer to improve a space, increased by 5.1 percent to $75.57 per square foot.
This came as office-leasing activity tumbled 43 percent in the second quarter from a year earlier, according to Collins.
Philip Heilpern, a senior vice president at CBRE’s Long Island office in Melville, said relatively few deals have taken place here since the pandemic started, as few leases expired.
“Like almost every other market in the country, we’ve had a fairly dramatic drop-off in the number of deals in the market,” Heilpern said. “ Everything inessential has been put on hold.”
He said Long Island office renters “have enjoyed a slight uptick in landlord concessions,” but at least so far there hasn’t been a surge.
“We’ve had dropping vacancy rates and rising rental rates in the last few years,” Heilpern continued. “Tenants in the market now are being wooed a little more aggressively by landlords who want to make deals and get their space leased.”
Darren Leiderman, executive managing director of Colliers International’s LI office, in Jericho, said the Island office market remains tight.
“There’s not a lot of space,” Leiderman said. “We haven’t had much building in the last 20 years.”
He said the Paycheck Protection Program helped companies pay office rent, benefiting both tenants and landlords.
“There haven’t been that many deals signed post-COVID,” he said. “Some haven’t been affected. Some have had more leniency and flexibility on concessions.”
An increase in working remotely is leading to more subleases hitting the market as well as workers separated by greater distances. And that is impacting the market as well.
“People still have leases,” Leiderman said. “People are saying work-from-home may impact the market. If you have a lease, you still have to do something with the space. Do you spread people out; do you sublease?”
New York City-based companies are shifting more Long Island residents to offices closer to home, fueling local demand, Heilpern said. Workers often work at home or travel to a closer office, instead of making the daily commute from LI to Manhattan.
“Clients said they plan to move some employees who live on the Island and work in New York City to their Long Island office,“ Leiderman agreed.
Heilpern said Long Island hasn’t seen “a dramatic drop in asking or taking rents,” even if concessions such as free rent are up. While deals are being sweetened, base rent at least so far hasn’t been impacted.
Leiderman said free rent, which initially was used to help companies cover moving costs, now provides leniency, while maintaining landlords’ base rent.
“When you refinance, you carry that higher rental rate,” Leiderman said of landlords. “It balances out.”
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