Join me on a journey back in time, three years ago.
At that point, we believed that the darkest days of the pandemic were behind us and that we were on our way to freedom. Freedom from our keyboards and the confining walls of our home offices. We were excited to return to our physical workplaces, whether they were manufacturing buildings, high-rise offices, or retail stores.
Unfortunately, nature had other plans. The Delta variant of the virus emerged, which although less severe, was highly contagious. Our plans for a return to normalcy were put on hold as staycations continued.
During this period of uncertainty, industrial manufacturing and logistics thrived, while office spaces struggled and retail shifted to online delivery.
Now, three years later, the commercial real estate sector, particularly buildings used for manufacturing and shipping, is experiencing a slowdown. So, what are the warning signs of this pause? Let’s explore a few of them.
Increase in sublease space
Three years ago, there was no excess industrial space available. Today, it has become a common trend in the industrial market. It’s like discovering unexplored territory on a map that was once thought to be fully explored.
The rise in sublease space signifies a shift in demand. Companies that once occupied these spaces are reevaluating their real estate needs. The surplus of sublease options indicates a change in how businesses view their workspace requirements, almost like a reverse game of musical chairs.
Extended time on the market
Remember when properties would quickly come and go from the market? Those days are fading as properties now linger, waiting for potential occupants.
This prolonged time on the market reflects uncertainty. It’s as if potential occupants are at a crossroads, carefully evaluating their next move.
Increased broker incentives
Brokers were once matchmakers, connecting tenants to the perfect property. Now, they have taken on a new role as negotiators.
Broker incentives have become a sign of the times. Trips, bonus fees, and touring currency are making a comeback. They serve as conversation starters and bargaining chips for landlords to sweeten the deal and convince tenants that the space is worth their commitment.
The increase in broker incentives symbolizes flexibility as the new norm. It acknowledges the changing market dynamics and the need for everyone to adapt to ensure a thriving marketplace.
More tenant concessions
Concessions such as free rent, moving allowances, and special purpose tenant improvements used to be rare. Now, they are offered like party favors at the end of a celebration.
Companies are looking for more than just a property; they seek a partnership. Tenant concessions are a gesture that says, “We’re in this together.” Landlords are bending and shaping their offerings to accommodate the evolving needs of tenants, resulting in a harmonious picture.
Softening in asking rates
Asking rates used to be non-negotiable, but today they serve as a starting point for negotiations. Landlords now recognize the need for realism.
They understand that it’s not just about what they think their property is worth; it’s about what tenants are willing to pay. The softening in asking rates acts as a bridge, allowing both parties to find common ground and reach a mutually beneficial agreement.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104.
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