Companies take a wait-and-see approach to leasing office space

As new ways of working force companies to reassess their office space needs, few are planning to move in the short-term – even if their leases are coming to an end.

A growing number of corporates are opting to extend leases on their current locations until there’s more clarity in the post-pandemic market and means for their workplace strategy. Others are pre-empting a future scramble for a new generation of workplaces, signing pre-let commitments for 2023 and beyond.

The wait-and-see approach is most prevalent right now in the U.S. where before COVID-19, renewals accounted for 29 percent of all office leasing activity.

But by the end of 2020, that figure was estimated to be around 70 percent, according to JLL data. Around 43 percent of renewals in the final quarter of 2020 were five years or shorter, and WALTs (weighted-average lease terms) are falling.

“There’s a short-term nature to many leases, with an increase in renegotiations for more favorable terms in the interim,” explains Phil Ryan, U.S. office research director for JLL. The gap between where U.S. office rent levels are and where they end up after discounts and other incentives has widened in New York, for instance, to 28 percent in the third quarter of 2020 from 6 percent in 2008, according to JLL.

“It’s been financial services tenants driving the short-lease trend,” Ryan adds. “However, law firms, who typically favor new construction, are taking space in new, high quality assets.”

Europe on hold

In Europe, the Paris region has experienced a slowdown in decision-making, as a recent overview by JLL explains. Last year, take-up fell by 45 percent.

In Germany, meanwhile, office take-up in the top seven cities fell 33.8 percent in 2020.

“In the current climate, the red pencil prevails,” says Stephan Leimbach, head of office leasing at JLL Germany. “Relocation plans are postponed for the time being, attempts have been made to postpone moves by using short-term lease extensions.”

Yet in London, a city where commercial leases traditionally last decades rather than years, market activity is more nuanced. Google, streaming giant Netflix and energy multinational BP, have all agreed to major leasing deals in the UK capital. Law firms Baker McKenzie and Latham & Watkins, having both signed pre-lets, will not be packing boxes until late 2023 and early 2026, respectively.

“There’s long-term confidence in London’s credentials as a top global city and destination to do business,” says Alex Colpaert, head of EMEA offices research at JLL. “But within all top cities, there’s a rethinking of what can truly be defined as prime right now.”

Changing corporate requirements

For companies planning an office move, location is just one factor on their minds. Amenities that support employee wellbeing, building health – such as good ventilation systems – flexible space and sustainability are all now prime considerations.

“What we can already see is that the requirements of office tenants are quickly changing,” says Colpaert. “Those firms who are on the move in the coming years could find themselves in truly reimagined buildings of tomorrow; offices that are reimagined, support hybrid working, and are therefore fit for new, post-Covid needs.”

However, prime offices will most likely come at a bigger premium, Colpaert notes, especially beyond 2021. Waiting may not always mean a better rent.

“Intuitively, you would expect rents to decline at a fast pace as markets encounter such headwinds,” he says. “But best-in-class buildings have been resilient. In some of the most supply constrained pockets in Europe, rental growth continues and for now, there is little evidence that prime headline rents have been significantly impacted by the past year’s disruption.”

Indeed, prime rents in central Hamburg, Berlin and Paris CBD have all risen during the pandemic. Prime office rents in Germany are tipped to rise by a further 1.5 percent this year, thanks to low vacancy of around four percent.

“Low vacancy rates in Europe’s top cities continue to push corporate requirements to the development pipeline which explains the many pre-lets we are seeing,” Colpaert says.

After a year in which Europe’s overall office take-up fell by 40 percent to its lowest since 2002, this year will be the peak of the current development pipeline, with the pandemic slowing new development past 2021 and 2022.

“We are now in a more tenant favorable market, especially with incentives rising quickly in some markets,” Colpaert says. “However, from 2022-23, this will start shifting again.”