We assembled a panel of industry experts to tackle this month’s question.
Here’s what they had to say:
Adam Altman, managing member, The KABR Group (Ridgefield Park)
The office market is highly inconsistent right now. There are some markets that seem to be doing well and other markets that are facing significant headwinds. New York City towers have remained lightly occupied. These buildings have continued as performing assets since they often contain long-term leases — with reliable tenants. Rents and therefore mortgages continue to get paid but lenders and borrowers are anxious. To be clear, if the public mindset does not shift from social avoidance to social participation in the next 12 to 24 months, there will be increased reason for concern for the New York City office market.
In the Northeast, suburban markets anchored by health, life sciences and technology are seeing extensions, renewals and growth. Landlords and tenants need to assess and take stock of the dynamics in their specific submarket to best prepare a go-forward leasing strategy. The momentum around work from home is real and normative practices will continue to be established. The likely outcome will be one of flexibility around when an employee is present in the office. Therefore, offices and office buildings will remain an important component of the modern day work dynamic. This is underscored by the announcement of leading tech and health care companies expanding their presence and investment in office. Companies that pride themselves on having a corporate DNA of mentoring and an iterative process will require a level of in-person collaboration for employees who seek to become thought leaders.
Leslie Florio, vice president of acquisitions and leasing, CHA Partners (Bloomfield)
As landlords are negotiating lease renewals, flexibility and creativity are playing large roles in the outcomes. Amongst smaller companies, we’re still seeing shorter-term deals, whereas some larger companies are maximizing on opportunities and locking in longer-term leases, many with built-in incentives. Overall, New Jersey is seizing the opportunity to attract companies from New York City that are relocating and/or exploring hub-and-spoke models. In these cases, companies are setting up satellite offices within New Jersey’s transit-oriented markets, opening them up to a wider pool of talent and customers who have migrated out of densely populated regions during the pandemic.
We are also seeing a new mindset emerge whereby landlords are thinking differently about space utilization. At some of our properties, we’re considering including smaller private office spaces that are large enough to allow for social distancing and provide a great alternate workplace for tenants. Employees growing tired of working from home, or that may be struggling with distractions at home, are seeking new options that allow them to remain productive closer to home, and these smaller space configurations can help them meet that need.
Carolina Gutierrez, manager, leasing and marketing, Alfred Sanzari Enterprises (Hackensack)
Unfortunately, the challenging business environment that emerged during the earliest phases of the COVID-19 pandemic continues to linger as we begin to look toward the new year. However, those early days taught office landlords the importance of close collaboration and flexibility, key factors in helping tenants navigate those significant challenges.
Whereas some landlords might have previously viewed lease renewals as just another business negotiation, lease renewals have now evolved to become collaborative discussions with tenants. Looking to 2022, landlords have an opportunity to work in tandem with tenants as they seek to understand the future of work and how it will impact their workplaces and workforce. Through a continued focus on two-way communication, landlords can ensure that tenants’ spaces are flexible enough to align with their current and evolving long-term space needs while also reiterating a continued commitment to tenant health and safety amidst the ongoing COVID-19 pandemic.
Julie Kronfeld, vice president, NAI Mertz (Mount Laurel)
As we look forward to 2022, the new Delta variant is playing a prominent role in office renewal decisions. Earlier this summer, many companies were focused on implementing plans to bring employees back to the office after the Labor Day holiday. Now, with the Delta variant in play and nearly every county in New Jersey being labeled ‘high risk’ for contracting the virus, companies are re-evaluating their return-to-work policies, and this continues to shape office market leasing trends. We see tenants taking the same amount of space with reconfigured space plans to afford more room between workstations and touch down stations for those sharing time in office and home office as an evolved model that is keeping the amount of space leased trending on par with historical numbers, suggesting renewals should flow in line with prior years. We also see tenants requesting short-term renewals while they assess whether employees will continue a work-from-home status. Tenants should make informed decisions in conjunction with information provided by a commercial real estate broker on current market trends. Our experience points to landlords having the ability to retain tenants and look forward to full occupancy in their buildings, albeit with rate and term flexibility as a necessity in some instances to preserve occupancy.
Mark Meisner, CEO and founder, The Birch Group (Nanuet, New York)
We have always had tremendous confidence in the strength of New Jersey’s suburban office sector, which is largely driven by its talent pool. While we began focusing on this market well before the pandemic, we feel the recent shift to the suburbs and key markets throughout the state will continue to drive lease momentum and renewals.
With many companies solidifying their return to office plans, we feel strongly about investing in our well-located properties that boast robust amenity packages and outdoor space. It’s more important than ever before that landlords and owners take a proactive, hands-on approach to the management of their assets and enact tailored capital improvement strategies to meet and exceed the evolving needs of tenants. We continue to listen carefully to our tenants, which we see as a huge differentiator in today’s competitive marketplace.
Eric Rubin, senior vice president, CREM and Northeast real estate, Columbia Property Trust (Morristown)
Given continued uncertainty in the office market, lease renewals in 2022 should be approached with flexibility from both landlords and tenants. This uncertainty continues to be based on companies evaluating space needs against the impact of remote and hybrid work schedules. On the tenant side, companies are looking to establish criteria such as headcount range, density and how the office space fits into their future business plans. After taking those factors into consideration with their architects and consultants, tenants should then communicate with their landlords to determine how this space can either work or be reconfigured to satisfy these objectives. On the other side, while landlords recognize the challenges facing tenants, they also must balance that with operating their buildings in a financially viable way and the need to structure leases on terms that make economic sense. To help tenants with 2022 renewals, landlords can look at providing free rent, tenant improvements and expansion or contraction rights, but those concessions need to be commensurate with a tenant’s starting rent and lease term commitment.
David Stifelman, managing director, JLL (Parsippany)
First COVID-19, and now the Delta variant has pushed office tenants and landlords into another environment of uncertainty as the company’s return to work (RTW) plans have once again become fluid and pushed back until this wave of uncertainty passes. Tenants have been questioning which model they should follow. Will my talent commute back to the office or do the employers need to establish offices closer to their talent?
Landlords have been preparing for tenants to return to the office. Well-funded landlords are upgrading their properties with both amenities and infrastructure improvements to attract and retain tenants. Cautiously optimistic well-funded tenants with an upcoming lease expiration are making a flight to quality with long-term commitments that provide them with the most flexibility to accommodate their workforce. These same landlords have been holding their pricing though providing tenants with greater concessions. Most other tenants that are not facing lease expirations are not making any bold moves until this current variant passes.