As the pandemic calls into question virtually every aspect of office space, more companies are opting for short-term lease renewals to avoid dealing with an unprecedented market, some of the city's top brokerages say.
Of the more than 35 renewals that Cushman & Wakefield has tracked since March, for instance, 53% were signed for five years or less. This is a sharp increase compared to September through February, when just 39% of the more than 75 renewals were signed for five years or less.
Cushman’s head of tristate research, Rich Persichetti, referred to this as a “bridge strategy” that will give tenants time to make longer-term plans in what many are hoping will be an easier environment to navigate.
A report by CBRE Group Inc. on the Manhattan real estate market for the first half of the year drew similar conclusions. During January and February, it found that just 35% of lease renewals were short term, but this jumped to 62% between March and June, with most companies opting for renewals of between one to three years.
From April through June, the average renewal length for tenants with more than 15,000 square feet of space was 3.7 years, a sharp drop from the average of 10.2 years during the same period last year, CBRE found.
“The wait-and-see environment has really blanketed the entire market,” CBRE researcher Matt Slattery said, “so renewing, especially in the short term, seems like that would be a nice way to wait out the uncertainty.”
Short-term renewals work as a win-win for both sides in the current market, CBRE broker Peter Turchin said. Landlords are happy to keep their spaces filled during the pandemic, he said, and tenants are happy to avoid moving in a real estate market that has arguably never been more unpredictable.
Eventually they could prove to be a win for the city by sparking a surge in demand for new office space a few years from now, when the leases end in what will hopefully be a much healthier market, CBRE said.
“I think once people can game certainty in terms of their business and certainty in terms of their employment levels, it will go back to longer-term deals,” Turchin said.
The few companies that are still trying to negotiate longer-term deals tend to be well established and confident that they will outlast the pandemic, Turchin said. These firms also might want to take advantage of the market by trying to get more flexibility in their leases than they normally would, he said.
“If people are certain about their business, they’ll be more likely to engage the market,” he said. “If you’re uncertain about your business, you’ll be more likely to do something for the short term.”
But even some well-established companies are opting for shorter renewals amid the pandemic. Law firm Allen & Overy, for instance, extended its 143,331-square-foot lease at 1221 Sixth Ave. for just five years during the second quarter, and Mitsubishi extended its 120,075-square-foot lease at 655 Third Ave. for up to three more years.
Overall, the average lease for deals in the second quarter was 7.8 years, JLL’s Craig Leibowitz said. He expects the trend toward shorter leases to slow once the threat from the coronavirus recedes.
"Post-vaccine, given the extraordinary capital costs it takes to make a commitment in New York City, we would expect that the longer-term lease average of about 13 years would begin to return," he said.
Newmark had been predicting a surge in lease renewals since mid-March, because the firm saw a similar trend during the 2008-09 financial crisis, said David Falk, president of the company's tristate region. It boiled down to one main concern, he said: saving money.
"We’re definitely seeing, as we predicted, a focus on the preservation of capital," Falk said, "and if you do a renewal, you are probably doing the least-expensive out-of-pocket transaction."
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Covid-19 uncertainty has led to short-term office renewals, brokers say - Crain's New York Business
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