- Office landlords are rolling out the red carpet to entice skittish tenants to sign leases.
- This is resulting in improved conditions for workers, from fitness to food.
- It’s also helping tenants through financial incentives like flexible leases and termination rights.
It could be a good time to look for an office lease.
This may appear counterintuitive at a time when most employers are waiting to see how remote work, a stagnant economy, and rising interest rates affect their office needs.
But, according to Insider, this is precisely why some office landlords are laying out the red carpet for prospective tenants. As office vacancies reach all-time highs in some markets, office landlords are frequently forced to find novel and creative ways to attract new clients.
Insider spoke with four high-profile office brokers who represent both landlords and tenants, as well as a lawyer who works on leases, to find out what kinds of perks are being offered.
According to them, landlords are using two main levers to attract tenants during this difficult period. One strategy is to capitalize on the tenant’s desire for flexibility by offering more favorable lease terms or conference rooms for rent. The other lever is to add amenities that make office spaces more appealing to workers, making it easier for employers to “get butts in seats,” as Colliers’ president of the tri-state region, Michael Cohen, told Insider.
This leads to better working conditions for employees and potential savings for tenants, who are increasingly wary of being locked into long-term leases. According to workplace swipe data provided by access control company Kastle Systems, despite many employers calling workers back to the office, workplace occupancy is only around 50% of pre-pandemic levels.
Of course, pulling these levers requires capital, so landlords with cash on hand will win. Some tenants are even demanding that office landlords prove their financial stability by sharing their financials — and some landlords are complying, according to brokers. In this market, landlords who can address the concerns of wary tenants, such as luring employees back to the office, will sign the most deals.
Expand fitness options
One way landlords are assisting their tenants is by upgrading their current amenities, beginning with sports and fitness.
“A lot of the buildings we’ve seen had an old Holiday Inn-style basement gym with a couple of treadmills and dumbbells, and that was about it,” Michael Lirtzman, the Chicago-based head of office leasing at Colliers, told Insider
Landlords are now building brand new gyms and only charging potential users a $10 fee to create their gym access card, according to Andrew Lustgarten, executive managing director of leasing for Savills in Los Angeles. Otherwise, it’s completely free. Landlords are also offering group fitness classes or personal training, according to Lirtzman. Some buildings, such as Sterling Bay’s 600 West Chicago building, even have on-site spas where employees can pay for a massage or facial after work without leaving the building.
Century Park, an office tower complex in Los Angeles’ Century City neighborhood, has a golf simulator room called The Range for tenants looking to unwind after work or liven up a daytime meeting. The membership is $40 per month, which is less than an hour of rental time at El Segundo Topgolf. According to Lustgarten, it has been a big draw for potential tenants.
“When you have 55-year-old managing partners of a law firm looking for office space, and they see the golf simulator, they get pretty excited,” he told me.
Pickleball has also proven to be popular. Conductor, a New York-based company, is constructing a pickleball court in its offices. Lirtzman stated that he has seen multiple designs for new buildings in Miami and Palm Beach that include outdoor pickleball courts. Employees can rent multiple pickleball courts in the basement of 28 Liberty, formerly the headquarters of Chase Manhattan on Wall Street, which is close to an Alamo Drafthouse, a movie theater with food and beverage service.
While 28 Liberty tenants must pay to use these services, they can play pickleball before work and watch a movie with a beer and chicken fingers delivered to their seats without leaving their office building.
Improve the food selection
The days of making coffee in the office kitchen are long gone. Companies are now looking for Starbucks or other coffee shops in their lobbies, a benefit enjoyed by tenants of many financial institutions such as JPMorgan, Goldman Sachs, and Deutsche Bank.
According to Risa Letowsky, cochair of Adler & Stachenfeld LLP’s leasing practice group, whenever a tenant of one of her clients signs a new lease, the landlord purchases a large gift card so the tenant’s employees can enjoy free coffee.
“I don’t think it’s causing tenants to sign for the space, but it’s a really nice gesture that helps introduce employees to the coffee shop,” Letowsky said in a statement. It also gets them acquainted with the coffee shop, which could serve as an informal workplace.
Some landlords are taking a low-capital approach, partnering with local food trucks and reserving space outside the office for them.
“If I’m a landlord, I know de facto have two or three food offerings every day of the week by giving them that status,” said Watts, CBRE’s president of investor leasing.
Aside from fitness and food, office tenants are increasingly seeking green spaces and commercial retail tenants who can meet the needs of their employees, prompting some landlords to seek out doggy day care providers on the ground floor. “You can drop your dog off for 25 bucks a day and go to work,” Watts went on to say.
Some landlords, according to Watts, are also bringing podcast studios to the tenant lounge. Employees with a “side podcast life” can then record audio or video in an on-site studio. It is not prohibitively expensive for landlords, and Watts claims it has grown in popularity in areas of the country with a high concentration of media and influencers, such as Los Angeles and New York.
Landlords are also realizing that employers value flexibility now more than ever. As a result, landlords are constructing large conference centers for tenants to rent for a nominal fee for all-hands meetings.
“Back in the day, you’d have to build a conference room that can accommodate one hundred people and takes up 2000 square feet of your space,” Lustgarten told me. They can now charge the landlord for that space.
Tishman Speyer, for example, is helping to offset potential space needs with coworking centers in their buildings. Tenants looking to downsize from their previous office space may be concerned that if all of their employees arrived on the same day, they would not have enough space. The building’s coworking space can help alleviate those concerns.
Brokers report that demand for spec suites, or pre-built office space for small and medium-sized tenants, has skyrocketed as more tenants seek turnkey office spaces.
“If you sign a typical lease tomorrow, by the time you do plans, permitting, and construction, in LA, it will probably be a year before you move in,” Lustgarten told me. “With these spec spaces, you could move in the next day if you want to.”
According to Watts, most smaller deals are now spec leases in some markets, and landlords have adopted the movie Field of Dreams’ motto: If you build it, they will come.
Of course, flexibility extends beyond physical space. It also implies flexibility in terms of lease length or space size, which landlords have previously avoided. But it’s now necessary. “Flexibility is absolutely key, the landlords who are embracing that are doing much better than the landlords who aren’t,” Letowsky said in a statement.
Long-term leases, which typically include landlord-financed office space renovations, are now being offered with lease-termination options. Some landlords are giving hesitant tenants some leeway if they discover 12 months into a lease that they require more or less space than they anticipated. Others are offering shorter leases, even for expensive spec suites, in the hope of filling that space with another tenant at the end of the lease.
Tenants are turning to lease extensions at the end of a lease term to buy more time to make office space decisions. Previously, a landlord may have declined the extension in the hopes of securing a longer-term tenant. This has changed.
“I would say 98% of landlords will say okay to a one-year lease extension right now,” Lustgarten went on to say.
“Flight to capital”
The newest and nicest office buildings have risen above the competition in a phenomenon known as the “flight to quality.” Tenants are now flocking to landlords with the deepest pockets. Lustgarten refers to it as a “flight to capital.”
“It’s great to have a nice building, but if you can’t perform with high-interest rates, it doesn’t matter,” he said.
Others agreed, with Lirtzman noting that the highest-quality and best-capitalized buildings account for 80% of leasing activity despite accounting for only 20% of the supply.
A well-capitalized landlord is required to make any of the above amenities a reality, from a nice new pickleball court to a built-out spec suite. However, signing a new lease requires a significant investment.
Traditionally, a tenant would sign a lease for unfinished office space that consisted of nothing more than a concrete floor, structural support beams, and an unfinished ceiling. The tenant could then customize the office space with financial assistance from the landlord, who would amortize the cost over the lease term. This type of financing, known as tenant improvement, is a necessary component of traditional office leasing.
It also necessitates significant upfront capital, which means that only the best-capitalized landlords can offer tenant improvement allowances, which are required to sign new leases.
“There’s no head of real estate with any company in the United States that wants to go to their boss saying, ‘We’re moving, and I need a check from you for millions of dollars,'” he said. “That’s how you get fired right now.”
According to Cohen, renters are willing to pay a higher rent in order to avoid the upfront capital hit on their balance sheets. After all, they’re dealing with the same high interest rates and capital constraints that landlords do. However, this has increased scrutiny of landlords’ finances, as some are unable to finance the deals they have just signed.
“Can they really afford to build what they’ve agreed to,” Cohen went on to say. “Right now, it’s caveat emptor (the Latin phrase for buyer beware).”
Tenants are now asking for — and receiving — information that landlords were once “loath to share,” such as details about the loan that secures a building and their overall financial health, according to Cohen. Tenants are also requesting that their renovation funds be placed in escrow. Lustgarten said he’s seen a number of lawsuits filed by tenants who haven’t received the funds promised by their landlords.
Rent abatements that have significantly increased can also be provided by well-capitalized landlords. According to Cohen, the pre-pandemic rule of thumb of one free month of rent per year of lease term has completely “lapsed,” with landlords now offering many more months of free rent to entice a tenant to sign. According to Cohen, landlords are spending the same amount on tenant improvements as they did before the pandemic, but for shorter lease terms and lower overall rents. They can afford to do so if they have the capital.
Without this level of capital, office landlords are frequently left with only one lever: renting below market price. While that works for some clients, all of the brokers we spoke with said it hasn’t attracted the best clients. Those customers want to pay the same rent but get more for their money.
Lustgarten described a current client, an American Lawyer 100 law firm seeking a large downtown Los Angeles office. They’re moving because they want to get their employees back to work, and they believe that moving to a nicer office will help them do so.
“We’re looking at buildings that are an upgrade to their current building, and that provide amenities that will get their workforce excited about coming back,” Lustgarten went on to say.