More Tenants Upsized Their Lease Renewals Than Downsized This Year

Though it runs contrary to the narrative of declining leasing activity in the wake of the coronavirus pandemic, lease renewal data shows that the square footage leased grew by 2.2% from pre-renewal sizes during the second and third quarters of 2020, according to Cushman & Wakefield research. But, don’t mark it down to social distancing.

Cushman & Wakefield Head of Economic Analysis & Forecasting Rebecca Rockey said the firm examined a sample of lease renewal data from 17 of the largest U.S. metropolitan statistical areas. To her surprise, the data showed a net increase in the total amount of square footage associated with those renewals.

Overall, 42% of tenants sought to upsize their renewals during Q2 and Q3, compared with the 35% that chose to downsize. About 24% had no change. The majority of firms looking to expand their space were leasing an average of 24K SF pre-renewal, while those looking to downsize were larger users in spaces averaging 36K SF, according to Rockey.

“Because of how much they expanded their footprints, actually, when you look at renewals … the effect of that on the total net change in occupied space was a positive 2.2% increase in occupied stock as a result of those renewals,” Rockey said during a presentation Dec. 10 at the National Association of Real Estate Editors’ virtual 54th annual real estate conference.

Though a higher percentage of tenants sought to upsize their leases, the actual volume of deals being done remains lower than usual, and overall national square footage being renewed is lower than a year ago. Rockey told Bisnow that 28.4M SF was renewed during Q2 and Q3 in 2020, down from 37.7M SF during the same period last year.

There has been speculation this year that more office tenants will increase their office space to promote social distancing. Rockey said she doesn’t agree with that point of view and that Cushman & Wakefield doesn’t have any evidence that upsizing is being driven by social distancing measures.

“When you think about the long-term nature of what companies are thinking about when they lease space, this will be in the rearview mirror soon enough,” Rockey said. “I think this is really a reflection of companies who [were] very certain about their plans pre-COVID simply moving forward with those and deciding to, on the margin, roughly grow their space.”

Most office occupiers plan their leases 18 to 24 months in advance, and in any given year, the market would see only between 10% and 15% of inventory roll, according to Rockey. Most leases are five to seven years long, so it can take longer for large market disruptions to materialize.

“Commercial leases are very long. It's very likely that we won't see some of these shifts that we're expecting to take place really kick in until 2022, with next year still being characterized by uncertainty and also a lack of demand,” Rockey added.

Rockey also said that although Cushman & Wakefield expects to see an increase in permanent work-from-home arrangements, that is likely to remain a minority. An increase in agile or part-time remote work is also anticipated, which may lower national absorption rates.

“We are expecting absorption rates to be about 20 basis points lower nationally as we move to a more work-from-home world,” Rockey said.

Despite the pandemic, Cushman & Wakefield expects that central business districts around the U.S. will continue to act as command centers for many firms in the future, and that those submarkets will likely reactivate when more businesses reopen.

“Watch what companies actually do, and not just the things that they're saying, or tweeting or whatever is in the headlines. There are some significant differences that we're seeing, in terms of where companies are leasing space versus what they're publicly saying in the middle of the pandemic,” Rockey said.