FROM THE OFFICE MARKET EXPERTS
Written by: Michelle Fude and Ryan McHugh
Michelle Fude and Ryan McHugh are part of a full-service leasing and sales team at Colliers | Columbus. In 2022 alone, their team was involved in 100 transactions valued at almost $172 million, accounting for the sale and lease of over 1.6 million square feet. Their specialization in the office market provides them with expertise on tenant behavior and current trends.
Compared to last year, are you noticing a shift in where tenants are looking for space? Why do you think this is?
Class A space has definitely gotten a boost, as projects like Bridge Park, the Pointe at Polaris and the Easton expansion have done well as many companies have leased newer, amenitized space as a way to incentivize employees to come back to the office. The Downtown submarket as a whole has struggled. Parking is more difficult and an added expense, which makes it even harder to bring employees back Downtown.
Are most tenants looking in one market or multiple markets?
Many tenants will consider multiple submarkets in their search for office space, especially when considering the suburbs of Columbus. While we typically see tenants in the Downtown area remain in the Downtown area, many tenants that have been considering the suburbs will review multiple suburbs. For example, we leased over 70,000 SF at two Class A buildings in Polaris in 2022. Of the 70,000 SF, roughly 50% of that square footage we were competing with another submarket such as Easton and Dublin.
What are tenants’ determining factors in choosing a location?
The most consistent determining factors for tenants when making their choice for office space include access to walkable amenities, access to on-site amenities for tenants and guests, distance from decision-makers’ residence and access to younger talent and workforce.
From your experience, how has COVID affected different industries as it relates to tenant demand and behavior?
We have seen call center users reduce their footprint as many of these employees are now working from home. In addition, a few larger corporate users have been slower to get back to the office, such as Nationwide and Cardinal Health. I would say the smaller, local companies are largely back in the office at least a portion of the time.
Are you noticing any trends relating to term or tenant improvement (TI) allowance? Are landlords offering more or less TI allowance, and are tenants signing shorter or longer term leases on average?
Many trends have emerged in office space transactions in the past 12-24 months. Construction pricing tends to remain on the higher end, coupled with the fact that there is a significant amount of second-generation office space that needs substantial upgrades, has resulted in landlords providing a higher Tenant Improvement Allowance to win a new tenant. In an effort to better position some of our vacancies, we suggest clients select targeted vacancies based on current tenant demand and spend the money upfront to position and speculatively build out the space now. From positioning the vacancy we’ve seen tremendous success once we have a prospective tenant for the space, as this typically results in a lower TI allowance needed to configure the space for the tenant, and moves quicker through the lease negotiation process and tenant occupancy. In regards to the lease term, we’re seeing tenants pursue closer to 5-7 year lease terms versus the previous 10 year. We’re also seeing more short-term 3-year leases to offer tenants flexibility as their workplace strategy continues to change.
At the end of Q3 2021 less than 31% of employees were working three or more times per week in the office. At the end of Q3 2022 we saw that the number rise to 54%. Are you noticing tenants discussing have their employees back in office?
Working in commercial real estate provides the ability to learn from decision-makers from various industries. One trend that has emerged regardless of the industry is most decision-makers want to find ways to bring their employees back to the office. While some form of hybrid will likely remain, such as work-from-home Fridays, the majority of CEOs and COOs we meet with share that they look forward to when more employees are physically back in the office to improve team comradery, collaboration among different departments, overall productivity, training and mentoring opportunities and overall workplace relationships.
New mixed-use developments continue to lead activity in the office sector. What are other Landlords doing to compete with these properties?
There is a flight to quality with many tenants in Columbus. The best way to compete with the perks of a new development is to evaluate your office building and understand what amenities you can offer to tenants. Many landlords have completed or are in the process of renovating some of their vacancies to offer full amenity areas for tenants free of charge. We’ve seen many landlords offer full amenity floors that include common conference rooms of various sizes, fitness facilities with full shower and locker rooms, tenant lounge and cafés, golf simulators, rooftop patios and/or any outdoor space, bike storage rooms, etc. Some examples of iconic buildings in Downtown Columbus completing similar renovations include The Hayden (20 E Broad), Encova Insurance (471 E Broad), Fifth Third Center, One Columbus, Huntington Center and 65 E State, to name a few.
What do you predict will be the next big trend in space design for office users?
To best compete with office space in the near future, I predict landlords will offer vacancies that are not only speculatively built out but fully furnished with top-of-the-line furniture and branding components. If landlords are willing to make the upfront investment of speculatively building out a space and then furnishing the suite so it can truly be “plug and play” for a tenant looking for quick occupancy or simply ease of occupancy, this could significantly increase their lease up timeline for their vacant office space.
For more information on current office trends, check out our 2023 Columbus Office Tenant Report!