Market Extra: Shorter leases? Top real estate executives Durst and Jones talk about the future of the office
Hotel operators aren’t alone in the race to create better experiences to attract visitors to their properties.
Office landlords also have been forced to adapt to the pandemic, including focusing on wellness, top amenities and a better overall experience for workers as part of a perhaps once-in-a-lifetime shift in the way office buildings serve tenants.
Potentially, the shift also means more traditional landlords could take a page from the WeWorks of the world, and offer tenants shorter-term leases.
“Office leasing has been great for long-term leases. We like it as investors, lenders and owners,” said Tammy Jones, co-founder and chief executive officer of Basis Investment Group, a national real estate investor and lender. “But there is talk about making office leases shorter.”
Jones, in a video interview with MarketWatch, pointed to the resilience of the multifamily housing sector, where yearlong leases have been the norm, as a potential model for office space going forward.
“Why can’t office come to that point?” she said, adding that while WeWork and other companies offering short-term office rentals “obviously, had some issues. But I think everything is on the table.”
Tammy Jones, co-founder of Basis Investment Group, and Douglas Durst, chairman of the Durst Organization, talk about the future of the office.
After shelving its IPO two years ago, a retooled WeWork is set to go public through an acquisition that values it at $9 billion, a fraction of its earlier $47 billion valuation.
Jones said landlords and investors need to stay on their toes, particularly as companies fight for talent in the “Great Resignation,” as waves of workers have retired early during the pandemic or looked for new jobs offering better salaries, flexibility or perks.
“First, I’d like to say that WeWork is a dirty word,” said real-estate developer Douglas Durst, chairman of the Durst Organization, during the virtual talk.
But he also called it a “definite trend” of shorter leases for smaller tenants in his buildings, “because they expand so rapidly.”
“So, it’s quite common for us,” Durst said. “One year is a little short, but two or three years is something that we are seeing quite a bit of.”
The Durst Organization has helped develop some of Manhattan’s most iconic office buildings, including One World Trade Center and One Bryant Park.
U.S. office occupancy rates still remain near 36% nationally some 19 months into widescale work-from-home evolution, according to Kastle Systems, which provides average occupancy rates in 10 cities on a weekly basis.
While some real-estate analysts think occupancy rates will dramatically improve in the first quarter of next year, a majority of Fortune 500 companies also plan to keep flexibility when it comes requiring staff to report to the office.
See: Nearly 70% of big U.S. companies are adopting a flexible work model, says Morgan Stanley
Many office landlords prefer longer-term tenants to create stability for the term of their mortgage debt, typically 10 years. That way, the building can be financed by lenders with the assumption that incoming rents ideally cover an owner’s expenses and mortgage payments, plus turn a profit.
Even the Durst Organization, which invests with is own capital and currently has low vacancy across its office portfolio, sees how shorter commitments make sense for some tenants.
Rethinking the office has been top-of-mind, particularly since it remains unclear when office leasing activity or valuations will stabilize as the two-year mark of the pandemic approaches.
New York City, a global financial hub, saw nearly $28.6 billion in market value in the office sector wiped due to the pandemic for the city’s fiscal year 2022, its first decline in two decades, according to a recent report from the New York State Comptroller.
That compares with multifamily buildings where demand for urban housing largely has been bouncing back and rents have shot back up, after last year’s flight to the suburbs.
Read: Rents are rising ‘ominously’ fast, according to some economists