The LoopNet Roundtable: 7 Experts Weigh In on the State of the Office Market

What’s up with office? For the past 24 months, it’s sometimes felt as if that’s all anyone in commercial real estate is talking about.

According to CoStar —the parent company of LoopNet — there are just over 760,000 office buildings in the United States, encompassing 13.3 billion square feet.

That’s a lot of space. And with the entrenched reality of work from home intersecting with an increasingly desperate housing shortage that could open the door to potential conversions, what is to become of the office sector?

To help answer that question, LoopNet assembled a veritable brain trust of commercial real estate professionals from some of the industry’s leading firms. With decades of experience, these individuals have a diverse range of specialties — brokerage, research and consulting expertise — and hail from markets across the country, from Albuquerque, New Mexico to New York City.

We asked each of these experts the same series of questions pertaining to the office market. Their answers, which span facets of the sector from the most in-demand amenities to how to reposition older assets, are presented below.

Jessica Morin, CBRE
They want amenities that are going to help attract their employees into the office. The most highly desired attributes of an office now are flexible open space, shared meeting space, private areas for calls and meetings and indoor air quality. Some of the amenities that were desired before the pandemic — like onsite cafes or outdoor amenities — are still highly desired, but they're almost now the expected standard.

[Tenants also want] anything that offers flexibility in their lease terms. Shorter leases are typically preferred. However, they're not always executed because of the tenant improvement allowances that are offered on longer lease terms.

There's [also] been an emphasis on sustainable building features. Sustainability has become increasingly important as companies strive to achieve that net-zero carbon target. And it's really not doable unless the occupier and landlord are aligned. It can't be just one-sided.

Michael Lirtzman, Colliers
The first piece is making sure that [employees] are excited about coming to the office. This means making it easy in terms of transportation, and that they're working in a high-quality asset with state-of-the-art features, and we've seen this flight to quality across the board. We’re also seeing that food and beverage is a big draw these days.

Donna Abood, Avison Young
I focus on the Miami and South Florida markets, and amenities are the key component. We used to use the term “amenities” to talk about features of an office building, but what’s become true after COVID — with people getting comfortable working from home and having the ability to take a break, get fresh air, and cook the food they want for themselves — is that amenities need to be centered around the issue of employee comfort.

In an office building, that could be anything from lounge areas, access to WiFi throughout the building, some sort of food component and outdoor courtyards. Some buildings are even looking at allowing dogs in the office.

Another important aspect is one we call an amenity, but really it’s the location. Employees want a location where they can get out and walk to run errands, go shopping or to pick up things. They need to get their dry cleaning, for example. So, a centrally-located office building is really a key priority.

Jonathan Larsen, Avison Young
Probably 30% of our clients are expanding. The other 70% are reducing by maybe 10% to 30%.

We're working on transactions in Columbus, Ohio and Phoenix with a global insurance company, for example, and they're shrinking [their square footage] by up to 50%, but they want to have an office, they need to have a presence.

Michael Lirtzman, Colliers
I'd say on renewals, they’re taking marginally less space. The trend we've seen with tenants that want to commit to a longer-term renewal — I would say five years or longer — is that there's generally been a net reduction in space of 10% to 15% across the board.

We're still seeing shorter term renewals driven by uncertainty, with those tenants tending to remain in their current footprint. And I think a couple things are driving that: there is a cost that goes with retrofitting your space and shrinking or growing. And there's a decent population of tenants out there that still really don't know what the future is going to look like for them and still haven't solved the formula as far as what that means for their physical footprint and space.

Tom Jenkins, Real Estate Advisors
In Albuquerque, New Mexico where I work, we are seeing tenants renewing, that's the bottom line. They're trying to renew for short terms of two to three years. And it's because no one really can tell them what the landscape is going to look like two or three years from now. I mean, we're experts in office and we are reading everything we can get our hands on, and everything keeps contradicting itself. So, even as advisors in the business, it's hard to get a handle on the future.

Jessica Morin, CBRE
Through our occupier sentiment survey, we did see something that was pretty interesting. Respondents were pretty evenly split [with regard to] their anticipated portfolio over the next three years. About 48% of the respondents expected to have their portfolio expand or stay the same over the next three years. And then 50% pretty much said, ‘we expect to contract.’

So, it's definitely not a one-size-fits-all decision. For the companies that are expecting to expand or stay the same, it's mostly driven by their anticipation for business growth over that time period. For the businesses that said that they expect to contract, that's largely due to hybrid work and office under-utilization, as opposed to trying to save on expenses.

Scott Homa, JLL
We are seeing around 20% net contraction and overall leasing activity is trending upward, but still about 25% below normalized levels. The average lease terms are lengthening, but this includes flight to quality, meaning that a tenant can be moving out of a dated building and into newer construction. If you are going to make a long-term commitment to office space, this means you are probably going to go to best-in-class product, but you’re going to take less space; so, your occupancy cost is not going to increase significantly.

David Smith, Cushman & Wakefield
In terms of the amount of space, I would say there is a whole spectrum of decisions that occupiers are making. Some see this as an opportunity, as many occupiers do coming out of a recession, to lock in really good, favorable rates for the long term.

But there are also a lot of occupiers that see this as an opportunity to reduce costs or to upgrade space. A common thing is that companies will look to reduce their footprint a little bit — say 10% to 15% — and upgrade the quality of their space, which often ends up being cost neutral, or maybe saves a little bit on a per-square-foot basis after you bring in all the tenant improvements and free rent concessions.

Donna Abood, Avison Young
Miami is very unique (and I'll include all of South Florida for this topic), compared to other markets in the United States. Miami did not have a reduction of rental rates at all during COVID — they actually went up. We saw rent growth. In fact, in some markets, I would say anywhere between 5% and 20% of rent growth occurred during that two-year period, depending on which submarket you were in.

Jonathan Larsen, Avison Young
Many landlords are in it for the long term. They don't want their rental rates to go down, because it lowers the value of the building. Instead, they are offering additional free rent or tenant improvement allowances because the cost of construction has gone up. If you don't use all your tenant improvements, you're able to use some additional small percentage towards free rent.

Michael Lirtzman, Colliers
There was a lot of fear about short term leases a couple of years ago, certainly in 2020 and even into 2021, that the new normal would be two- and three-year leases, instead of tenants relocating and signing traditional 10-year, long-term leases.

We have not seen that. Where we have seen some shorter-term leasing is on the speculative suites that landlords are building all over the place.

Smaller tenants in particular, typically 10,000-square-foot users and under, are looking for a turnkey, ready-to-go solution. Where landlords in the past only wanted to do those for a minimum of five years, if not longer, we are seeing some willingness among landlords to commit to just three years. I wouldn't say it's an overwhelming trend, but we have seen a little shift in that direction.

Rents have remained stable if not increased in most markets across the country, but that's been offset by concession growth. Free-rent periods across the board have remained very high and have grown in certain markets. Tenant improvement allowances are the concession that has grown the most, certainly in the last year or two.

Jessica Morin, CBRE
We've seen both concessions and free rent rise, especially in lower quality buildings. For higher quality buildings, we had a U.S. [flight to quality] brief where we looked at 2,700 lease comps from 2019 to the first half of this year. And we saw that free rent actually rolled back on the top-tier space. It's still above where we were in 2019, but it's rolled back a little bit over the last year. However, for lower quality space, free rent and concessions and forms of tenant improvement allowances have increased.

David Smith, Cushman & Wakefield
The average lease length has not changed. But renewal [terms] have gotten shorter on average — though it looks like that's bottomed out and terms are now starting to get longer — but they still remain, on average, shorter than they were before the pandemic. And those lease terms are contracting by roughly 10% to 15% on average right now.

In many cases we're seeing landlords willing to give more tenant improvement allowances on long-term leases and occupiers seem willing to lock in space and upgrade it. Some of that increase in TI allowance is due to the quality of the space. The importance of the employee experience is top of mind right now.

Michael Lirtzman, Colliers
The two obvious ones are subleases — there is a lot of sublease inventory — and coworking. Subleasing is a bit of a separate discussion because subleases are not for every tenant, and the majority of subleases out there are short-term and that's a little less attractive.

And the absorption on subleases is not great. Whether that's a function of the shorter term, lack of concessions available, the quality of the space or a mix of all that, we have not seen a ton of sublease absorption.

We have seen some activity in the coworking sphere. There is an element of flexibility that they can afford tenants, which traditional landlords are not quite set up to do. That said, we've also seen some large landlords across the country get into the coworking space on their own. Tishman SPS and Hines, among others, have gotten into that space. And we have seen some traction with short-term leasing and incubating tenants who may have shut down their offices through the pandemic or in areas with nuggets of startup activity.

Tom Jenkins, Real Estate Advisors
We don't have the WeWork-type businesses [in Albuquerque]. We've got a few local coworking facilities. It is not that big of a deal here in our market. We do have a couple that are specialized, focusing on the tech sector for example. And they create these environments where entrepreneurs or small operators go and have collisions. So, it's almost like an incubator.

Jessica Morin, CBRE
Of course, subleasing is always an alternative to direct leasing, and we have quite a bit of sublease space that's available on the market. It's typically offered at a discount, and it's built out. Because of that, a lot of larger companies haven't been as attracted to sublease space because they really want to customize it. So, I think a lot of those large sublease blocks are going to continue to weigh on the market.

David Smith, Cushman & Wakefield
I think the most interesting alternative is in how landlords over the last couple of years have thought about flexible office and coworking in their building. We've obviously seen a number of owners who have started their own coworking brands and see that as a strategy across their portfolio — not necessarily in every building, but in some.

That strategy serves a couple of purposes. First, it creates some revenue for space that maybe they're not leasing right now, which is good. Second, there can be some halo effect if you have quality, even “cool” coworking space that makes people feel a certain way about the building and about that neighborhood or that block. And then you have companies that might expand over time and will eventually need a traditional lease. You're already their landlord and can move them into their existing building or another building nearby.

Scott Homa, JLL
Some owners are making large investments into building amenities to try to lure people to the office. They are trying to make the office a magnet rather than a mandate. And they’re doing so with these highly activated lobbies and rooftops, fitness centers, food and beverage and whatever it is that they can do to put a carrot in front of these employees to encourage them to come back. Employers aren’t using a stick to say, ‘you better be there.’

Michael Lirtzman, Colliers
Owners should be pushing the envelope, looking at what's next, in terms of, not only building amenities, but public spaces within the buildings; converting building lobbies, particularly in some older assets, from sterile clinical spaces that weren't set up for collaboration. You know, in a lot of older buildings, the lobby was set up as something of a museum piece to look at, but not touch or sit and get comfortable. How do you now make those lobbies into spaces that people can use for meetings? Can tenants use those to greet their customers, greet their guests or for their employees to go sit? We're seeing a lot of soft seating being introduced in lobbies, and WiFi connectivity, charging stations and high-top tables that are conducive for meetings. Those changes make an office building feel a little bit more hospitality-driven, akin to the lobby of a high-end hotel.

Tom Jenkins, Real Estate Advisors
In Albuquerque, we have not seen a tremendous amount of change in terms of inventory improvements as a tertiary market. And a big driving factor in that is our cost of renovations and improvements. When this pandemic started, we were all saying we're going to have touchless entry systems for doors as well as upgraded HVAC that exchanges air better, and we haven't seen that in these tertiary markets.

Instead, we are just seeing renewal, renewal, renewal and what's driving it isn't the amenities, it's the flexibility. Tenants want the flexibility of being able to have short term leases, extension options, etc. So, we're not seeing the addition of physical amenities in our market.

Jessica Morin, CBRE
Some owners are definitely investing in their buildings to the extent that they have the capital for it. And to the extent that tenants are willing to invest in moving to a new space — they’re motivated by that flight to quality.

There's also increasing talk right now about taking outdated space and turning it into a completely different use, whether it's for life sciences, residential, hotel or multifamily. We’re tracking projects that are either underway or planned. And there are quite a few planned projects right now across the U.S. that intend to take that outdated space in Class B, C and older buildings — that have been vacant for a while, or are nearly vacant — and turn it into something else.

Donna Abood, Avison Young
Because the market [in Miami] is so strong, as long as owners have a well-located building, they’re probably not putting a lot of capital into their building right now, unless it was already planned before COVID. But they will be looking at this very soon as our economic cycle continues to move to the next phase.

Jonathan Larsen, Avison Young
Leasing activity is happening everywhere from CBDs to suburban markets, to tweener [in-between] areas. In Los Angeles, we have the arts district; in New York it’s the meat packing district; in Nashville, it's the warehouse district.

But we see traditional firms that would have always been in the CBD, looking more at the meat packing district, the arts district, the warehouse district, or the music district. This is because the buildings are being built to a quality standard, but they also have a little creativity and amenities like abundant parking, rooftops, balconies, things like that.

Michael Lirtzman, Colliers
In some of the south and southwest markets, in particular, we have seen some suburban locations thrive and push [tenants] outside of the urban core. You look at a market like Dallas, where there's been a lot of growth outside of the urban core, and its office market has mushroomed out over the last 10 or 15 years. Some of the suburban markets there are doing really well.

Certain markets that [have done well] do not necessarily feature robust public transportation systems, such as Dallas and perhaps Miami. They tend to be much more friendly to drivers, but still have a high-quality, dense suburban population and workforce. These markets offer a certain convenience for getting to the office, enabling people to avoid public transportation. But those assets also either have more existing parking, whether it's surface parking or structured; or, in the case of new developments, they can build parking into the program.

Jessica Morin, CBRE
In general, the suburbs have outperformed downtown since the pandemic in terms of vacancy and rent growth. With that said, there are also some downtowns that have seriously outperformed, such as Austin and Miami.

On the other hand, you have markets like New York, Dallas and Los Angeles where their downtowns have lagged, But outside of their downtown core, those cities have actually done pretty well in terms of leasing. So, for example, in Manhattan, while overall demand is still pretty weak (but improving), Midtown posted over 4 million square feet of leasing in the second quarter of this year. And that's up 25% from the first quarter of 2022 and it's above the market's five-year average. For Midtown, this activity is really because of the flight to quality. That's where the best-in-class buildings are.

Downtowns are always going to be the most vibrant places for young professionals. And I don't think that's going away anytime soon. Everything that has attracted people to downtowns is going to remain attractive. And there are downtowns in some markets that are absolutely thriving.

David Smith, Cushman & Wakefield
We have not seen a flight out of CBDs toward the suburbs. One of the concepts that came up a lot, especially early in the pandemic, was whether companies would move to more of a hub-and-spoke model. But we really haven't seen that play out very much. It’s potentially a costly way to go, and companies are not looking to spend excess cash right now.

What we have seen in the data was that CBD leasing activity was impacted more by the pandemic than the suburbs, meaning leasing activity declined more. The other thing that's interesting is that, over the last year, we are seeing CBD leasing activity rise — year over year, it's up 44%. Meanwhile, suburban leasing is also improving, but it's up 28%. So, initially in the pandemic the CBD was impacted more severely, but we're also starting to see it bounce back a little bit more sharply.

Donna Abood, Avison Young
I think it's been clearer recently that if the building is not well located in a walkable area, it’s going to suffer and not be leased up. This is really a new phenomenon. It used to be that if you were on an expressway, that was key. But now the higher priority is walkability, because it’s all about bringing the employees back to the office. So, definitely the urban areas are doing very well, where you can go outside and walk to a restaurant.

Michael Lirtzman, Colliers
That's the big question that everybody's asking right now. Certainly, in a number of markets across the country, we've seen potential repurposing of assets in markets where there is multifamily or hospitality demand.

It's also location specific. If you own an asset in a fundamentally bad location, that is out of fashion or has become undesirable, it’s not easy to pivot and change use. We've advised a couple of clients to reposition a Class C asset if the location is sound, and upgrade it so it's perceived as Class B. A lot of Class C assets have just suffered from lack of investment over the years, but they're in fundamentally decent locations. So, what are the upgrades that you can make to your building? If your capital stack allows, can you add some of the amenities that we've talked about? Can you upgrade some of the vacant spaces or make them somewhat more attractive?

That A-plus building that's going to achieve top of market rents — that's not for every tenant. Can you make your property a quality B building? A best-in-class B asset? Because there is a universe of tenants who've always been in Class B assets, and they'll continue to be. That's just the rent that they want to pay.

Interview responses have been edited for concision and clarity. Editing and reporting by: Daniel Schmergel, Lauren Shanesy, Joe Beeton, Margarita Foster, David Matthews, Lili Monette-Crépô and Andre Simoneau.