More and more people are turning to work-from-home or remote working opportunities. That, coupled with higher interest rates have been significantly impacting the commercial lease market in recent years.
The dynamics between landlords and tenants are changing as the work-from-home trend continues and interest rates have yet to come down. These realities are affecting everything from lease terms to vacancy rates. Looking into how the shift is affecting commercial real estate investments may help investors to make more informed decisions about their options.
Reduced demand for office space
The shift towards remote work has significantly reduced the demand for office space in many markets. Many companies are downsizing their physical footprints, opting for smaller offices or entirely remote operations. In many instances, this is leading to increased vacancy rates and putting downward pressure on lease prices. A number landlords are offering more flexible lease terms, including shorter durations and enhanced amenities, to attract and retain tenants.
Subleases becoming more common
As companies reassess their space needs, subleasing has become a popular option. Some businesses with excess space are looking to offload their unused square footage, leading to a surge in sublease availability. This can create opportunities for smaller companies to access premium office spaces at reduced rates. At the same time, it can intensify competition among landlords to fill direct lease vacancies.
Greater emphasis on lease flexibility
Tenants are generally counting on landlords to have greater flexibility when it comes to their lease terms due to widespread changes in market conditions. Options like scaling space usage or making other changes to suit the business’ needs are valuable. In some cases, flexibility is leading an increase in shared office environments. Tenants may want to rent these spaces on a month-to-month basis so they don’t have to deal with long-term lease commitments.
Impact on retail and industrial spaces
Commercial office spaces are the most directly affected by the work-from-home trend, but retail and industrial spaces are similarly impacted by higher interest rates. The current interest rates discourage consumer spending, which can negatively impact the retail lease market more broadly. E-commerce trends are also pushing this change.
Negotiating power shifting towards tenants
Increased vacancy rates and economic uncertainties are tending to push negotiating power in commercial leases towards tenants. Companies looking for space more commonly have more leverage to negotiate favorable terms, such as rent reductions, tenant improvement allowances and more flexible lease conditions at present.
Commercial real estate investors should consider these trends and others that are market specific when they’re determining how to handle their properties and any additional investment opportunities that they may come across. If changes in their standard leases are necessary, it can help to have a legal representative who can review the leases to better ensure that they feature necessary protections.