FROM THE MARKET EXPERTS
Written by: Dan Dunsmoor and Michelle Fude
As Brokerage Executive Vice President, Dan Dunsmoor has been involved with over 750 commercial real estate transactions valued in excess of $800,000,000 and accounting for over 5,000,000 square feet. Dan is recognized as a market leader in the Columbus, Ohio commercial real estate market, specializing in the leasing and sales of Class A & B office space. Michelle Fude specializes in office leasing and tenant representation. Michelle delivers constant communication to clients through activity reporting on all current deal activity and provides daily creative solutions and proactive marketing plans specific to each property. Keep reading to get Dan and Michelle’s take on tenant-related trends in the office market.
Compared to last year, are you noticing a shift where tenants are looking for space? Why do you think this is?
MF: Historically, there have been several trends in the market that remained in 2020. For example, Dublin is one of the more popular submarkets from a migration standpoint of pulling new tenants into the market and retaining current tenants in the market. Dublin and Easton are known for keeping companies in the area once they’ve moved there. This is due to a variety of things including abundance of amenities in the areas and accessibility to the rest of the city and where employees and management live. Another trend we’ve seen in the past, and continues throughout this year, is companies considering Downtown also considering the Grandview area. This is due to cost savings in parking and price per square foot, while still achieving the centralized location in the city and proximity to Downtown amenities. As companies continue to try to save costs, this trend will likely continue. The good news for Downtown is Grandview has less than a 4% vacancy rate which remains relatively steady quarter-over-quarter.
Are you noticing any emerging trends in lease size? Do you feel as though tenants are wanting more or less space now because of COVID?
DD: Generally speaking, yes, we are seeing that many of the companies that are signing new leases right now are taking approximately 10% less space than they were planning to take earlier in their process. That said, the sample size is too small to really tell because so many of the companies that would have relocated or signed new leases signed short term extensions at their current location so that they could take additional time to understand their long-term needs.
MF: Since companies were forced to adapt working remotely due to the shutdown, there have certainly been companies that have decided they could operate in a smaller footprint and/or sublease their office space entirely. Year-over-year the amount of sublease space on the market has essentially doubled in square footage. At the end of Q3 2019 there was roughly 650,000 SF of sublease space on the market compared to the end of Q3 2020 at approximately 1.1 million square feet. This number is slightly skewed by big block users such as Alliance Data, but the amount of sublease space entering the market is an indication that people are looking to lease less square footage overall to save costs. While that may be the majority, we’ve still seen several companies work through expansions and take on more square footage to accommodate room for social distancing and larger workstations to make their employees comfortable enough to physically come back into the office.
Are you noticing any changes in TI (tenant improvement) allowances from landlords due to slowed tenant activity?
DD: We are seeing many landlords come to the table with creative up front concession packages that either include additional tenant improvement allowance (TI), abated rent or an additional portion of the TI that may be used towards soft costs such as FF&E (Furniture, fixtures, and equipment). This is all in an effort to preserve building values by maintaining face rental rates while also getting more aggressive to secure new tenants in this environment.
Are you noticing any trends as far as term length? What types of users are signing shorter vs. longer term deals?
DD: The average lease term for new leases is down from just over 70 months last year to 60 months this year. Again, this is working with a smaller sample set. It seems that professional service companies such as law firms, accounting firms, etc are more willing to enter into long term agreements right now. We’ve seen law firms sign 10 and 15 year leases during the past several months and multiple other professional service groups sign seven and 10 year terms. Technology companies seem to be the groups that are less certain about their space needs because they can more easily adopt permanent work from home strategies.
MF: We’re seeing more companies in the market requesting three-year lease terms or shorter while they work to figure out what square footage they may ultimately need in the long run for their company. This seems to be more dependent on the type of company. For example, tech and creative companies that have significant sales force, tremendous growth plans and people on the phones that may have previously been packed into the space, those companies seem to be requesting shorter term leases to give the flexibility to grow again once their market stabilizes. Law firms, accounting firms and more traditional office users seem to have a steadier growth model and understanding on how they use their space allowing them to commit to a longer lease term.
For the full interview, check out our 2021 Columbus Office Tenant Report.