What Now? Tenants Are Demanding More Than Flexibility

Tenants are once again assessing their office needs, and it’s becoming clear that hybrid workplace policies require less office space per worker than previous models, particularly with usage plateauing at about 50% of pre-pandemic levels, according to Kastle Systems’ return-to-office data.

Meanwhile, office landlords are competing with historically high availability of direct and furnished sublet space. Add intense lender scrutiny on the outsized concessions required to win new tenants and upcoming loan maturities in the face of a frozen debt market, and tenants with upcoming lease renewals have the upper hand to make demands for shorter terms, space give-backs and more.

As traditional long-term office leases come up for renewal, the downshift in demand is expected to cause as much as $1T of office asset value destruction, according to an NYU Stern School of Business and Columbia University Business School paper. According to its authors, the trend challenges the basis for valuation for most office assets and potentially creates a tipping point for how office real estate and workplace services are offered and consumed.

An executive with international flexible office provider Serendipity Labs noted that traditional office tenants are not just looking to downsize and enjoy shorter lease terms. They are also seeking alternatives to long-term office leases that are fully serviced campus extensions and which are compliant with high standards for technical security, employee safety, privacy and data protection. The office space should also provide access control and a variety of settings to allow employees to collaborate and connect. 

“We are now seeing clients that need to accommodate up to 100-plus employees who are shedding long-term office leases in favor of outsourcing their workplace needs to us,” said Jim Murgillo, vice president of corporate sales for Serendipity Labs. “With enterprise-grade technology and the highest customer satisfaction levels in the industry, we can serve as a trusted partner to deliver a compliant, inspiring campus extension. That’s a lot more than just a flexible lease term.” 

Landlords Adjust

For office owners, competing for tenants now requires more than hiring a leasing team and property manager to optimize returns from long-term leases. Owners are partnering with trusted, flexible office providers to satisfy tenant demand for outsourced workplace solutions as part of the product stack in their office buildings. 

Kyle Ciminelli, executive vice president of Newmark Ciminelli, a national brokerage firm with an office in downtown Buffalo, New York, said that placing a flexible coworking space in the city's prominent Seneca One office property is an example of how employers are responding to how today's employees want to work.

“Working with the only national flex provider in Buffalo is one way our company can actively participate in that process,” Ciminelli said. “We understand the need to keep pace with demand and current workplace trends, which is why we continue to be excited about Serendipity Labs and their success. I think it makes sense to expand the offering further in Western New York in the future.”

With record U.S. office vacancy levels of 20% and overflowing sublet availabilities, it seems that it will continue to be a tenant’s market, Murgillo said.  

“Even offering outsized rent concessions and shorter lease terms have not been enough for landlords to compete with the outsourced workplace option,” he said. “Maybe in the long run, the best way to convert traditional office space and extract value from office buildings is to offer more of it as fully serviced outsourced workplaces.”

This article was produced in collaboration between Serendipity Labs and Studio B. Bisnow news staff was not involved in the production of this content.

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