Office renewals have a shrinking problem

Average lease size down 19% from prepandemic to 3.2K sf as vacancies rise

Office Renewals Coming With Diminished Space
(Photo Illustration by The Real Deal with Getty)

Office landlords will take lease renewals over tenant departures, but even those renewals aren’t what they once were.

Lease signings are on the rise, but occupied office space across the country is declining precipitously, the Wall Street Journal reported. That’s due in part to tenants grabbing less space for less time, growing more flexible about their waning office needs.

Tenants signed new deals for 97.5 million square feet in the second quarter, trouncing the 57.4 million square feet they agreed to in the same period in 2020, according to the CoStar Group. Yet the country’s vacancy rate has risen from 9.5 percent pre-pandemic to 13.2 percent today; CoStar projects that to surpass 17 percent by the end of 2026.

The discordant numbers are rooted in softer renewals. The average office lease was slightly below 3,300 square feet in the second quarter, a decrease of 19 percent from the average between 2015 and 2019.

“If a tenant signs a lease for 100,000 square feet and they move out of 150,000 square feet somewhere else, that’s a negative event for the market,” CoStar’s Phil Mobley told the publication.

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Occupancy tells more of the story. For all but two quarters since the start of the pandemic, tenant space has dropped from one three-month period to the next. That trend has increased drastically in the last two quarters as occupied space dropped more by more than 20 million square feet in the first quarter and 15 million square feet in the second.

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Tenants who are cutting back on space are largely doing so because of their embrace of hybrid work policies. They don’t need as much space because workers aren’t coming in every day.

One category of tenants demonstrating the trend are law firms. Legal firms that have recently faced renewal have reducing their space by 13 percent, according to a report from Cushman & Wakefield. Considering many tenants — legal and otherwise — haven’t seen their leases lapse in recent years, the trend appears likely to continue.

Not to say there aren’t individual deals bucking the overall trends. Law firm Davis Polk & Wardwell recently signed a lease renewal with RXR at 450 Lexington Avenue, a deal that will see the company’s footprint increase by 30,000 square feet.

Holden Walter-Warner