Last fall, amid a chaotic time of tech layoffs, slumping office space demand, and continued interest rate hikes, data emerged that office occupiers were looking at shorter lease terms. It wasn’t an entirely new trend since the early days of the pandemic, the big question surrounding the future of the office was already leading many in the industry to think about scaling back lease terms. But nearly three years after the early days of the global health crisis, with average office occupancy still significantly lower and a looming recession, office occupiers—especially larger corporate users—are looking to mitigate risks with shorter leases and more flex space.
As vaccines began to roll out in the first half of 2021, a lot of occupiers began planning their return-to-office plans. While a lot of workplaces quickly returned back to the normal that existed before March 2020 (plus masks and some social distancing), many others around the country remained empty or nearly empty. A lot of workers simply did not want to go back to the office or had moved to another city or state and weren’t able to return. The backlash led to what has been called “The Great Resignation,” and companies looking to retain talent adjusted their plans to meet employee demands. In a JLL Future of Work survey that polled more than 1,000 corporate real estate leaders, 43 percent said they would bump up their investment in flex space over the next few years. The increase was attributed to the increase in hybrid work models, a flight-to-quality trend among occupiers, and companies looking to avoid locking into long-term leases.
In the nation’s largest office market, New York City, in a lot of ways, things have gone back to normal. Average lease terms across new deals being completed returned to pre-pandemic numbers in 2022, according to data from CompStak. However, in New York and in most gateway markets around the country, tenants that do stay and renew their office leases are doing so at shorter lease lengths. “Anyone who is staying in place, it seems there’s a bit of hesitancy to sign for a longer-term renewal,” said CompStak’s Alie Baumann.
Average Office Lease Terms – New York City
Average Office Lease Terms – San Francisco
While lease lengths are getting shorter for tenants renewing or extending in place, lease size is also decreasing. Smaller companies, used to working in a more collaborative setting, have been leading the return to the office, while larger companies that were already decentralized have been reducing their office footprints due to lower office utilization. Jessica Morin is CBRE’s Americas Head of Office Research and recently authored a report on the trend of larger occupiers leasing smaller spaces. The average lease size decreased by 18 percent in the first three quarters of 2022 compared to the pre-pandemic (2018/2019) average, according to the report, while the total volume of square footage was down 14 percent in the first three quarters of 2022 compared to 2018. With interest rates and inflation still high, Morin said she expects to see continued hesitancy of tenants to relocate due to high buildout costs, and that could impact overall leasing volume.
Recent layoffs, notably in the tech world, are not boding well for the office market looking ahead. A report from CommericalEdge earlier this month foresees office-using employment growth falling as layoffs continue this year. The number of office sector jobs added every month averaged 117,000 per month between January 2021 and July 2022, but over the last five months, the number of office jobs added has only averaged 25,000 per month. Meanwhile, as the office market faces uncertainty, the demand for co-working space is expected to continue to grow. And there’s maybe no bigger market in the U.S. for flex space than in New York. In 2019, before the office market was radically changed by COVID-19, the amount of flex office space in New York was growing at a pace of 23 percent annually for nearly a decade, according to JLL.
CBRE’s most recent occupier sentiment survey, which polled more than 185 corporate real estate executives with U.S. office portfolios, found that occupiers overwhelmingly are seeking to have flex office space, shared open space, and anything that supports a collaborative environment. More than half of the survey’s respondents said they expect flex office space to make up a significant part of their portfolio, a notable increase from 35 percent in the previous year’s survey.
New York City’s largest office occupier, JPMorgan Chase, is gearing up to open its new headquarters at 270 Park Avenue, and flexibility is one of the keywords the company has been using to describe the 2.5 million-square-foot space. The banking giant expects to have half of its workers in the office full-time while 40 percent will work in a hybrid model. The other 10 percent of staffers will be remote. For JPMorgan, while flexibility is one of its guiding forces going forward, company leaders have indicated that, at least for certain portions of their workforce, being in the office full-time is crucial. “It doesn’t work for young kids or spontaneity or management,” JPMorgan Chase CEO Jamie Dimon said during an interview at Davos last week, adding that for other jobs, like researching and coding, remote work is more reasonable.
Big-box chain Target has adopted flex space as part of its workplace strategy going forward as well. In the spring of last year, company leaders shared details about how they redesigned the company’s headquarters in Minneapolis, Minnesota, to better accommodate new hybrid work models and began testing a flex floor concept at their HQ buildings. “We’re leaning into a ‘flex for your day’ approach and encouraging our HQ team members to test and explore when and where they need to be on any given day to do their best work,” said Senior Vice President, Future of Work, HR at Target, Steve Brophy. The office redesigns also added open-format floor plans, Zoom-outfitted conference rooms, reservable desks and day lockers, and pickup spots for food and deliveries.
Another example of a headquarters revamp with plenty of flex space in mind is LinkedIn’s revamped headquarters in Sunnyvale, California. The company’s original plans in 2020 were scrapped in order to accommodate a hybrid-heavy environment. The company’s new office has a slew of different kinds of workspaces for employees, including deep focus areas, flex zones, and what it calls “neighborhoods,” workspaces grouped together for one team in an open layout that can be reconfigured and adapted for each team’s needs.
JPMorgan, Target, and LinkedIn are among a growing number of corporate occupiers rolling out flexible workspaces as part of their office vision going forward. For the companies, it’s a compromise between allowing remote and hybrid work and still keeping a strong office presence and company identity. It’s also a way to boost employee retention, an important issue for a lot of companies right now, given the ongoing labor shortage.
For building owners, shorter lease lengths could cause problems in a few ways. With fewer tenants locked down for longer time periods, turnover is higher and can lead to a higher vacancy rate. With higher turnover, owners may very likely have higher costs related to concessions, tenant improvement, and leasing commissions. No one knows for sure how long remote work as a result of the pandemic will continue, and opinions are split on whether it will be permanent or have an end date on the horizon. But many in the industry feel that flexibility will continue beyond our current era and are building out their corporate headquarters to adapt to that reality and to bridge the gap between remote and in-person office work.