So now that a global recession seems more likely, will leasing rates start to drop?

Office tenants are trying to understand with talk of a global recession likely to occur why are leasing rates not decreasing by a substantial amount?

Throughout this past year tenants have been wondering why rates are close to the pre-pandemic levels. There are several factors effecting this situation. First let's look at it from the landlord side. For many years before March 2022 interest rates were at 0% which allows for low borrowing costs for landlords who hold mortgages on their properties. One would think due to this landlords have room to lower leasing rates. But actually, it is the opposite. Due to low mortage rates landlords have to room to keep leasing rates high with a slight decrease in occupancy rate. The longer they can keep leasing rates high the more valuable their property becomes and better borrowing costs they can get from banks. Of course, once a decrease in occupancy hits a certain level leasing rates would have to come down in order for the landlord to sustain the current economic conditions.

From the tenant's perspective business conditions have held up very well once the initial shock of the pandemic passed and most of the world has fully reopened. Most companies at this point want their employees back in the office at least in a hybrid model for part of the week. Therefore, reducing the space requirements without a decrease in business is very difficult. Whether full-time or a hybrid model, each employee still needs a desk to work at. Also, to attract employees to the office workers want larger workstations for social distancing and in addition larger communal areas as well. Therefore, for the most part leasing rates have been very stable since the economy reopened.

So now that a global recession seems more likely, will leasing rates start to drop? Certainly, landlords located in growth markets outside of New York have an advantage due to some companies opening up satellite offices in Miami or Dallas as examples. This becomes advantageous to current tenants in New York City. We now see landlords not reducing leasing pricing very much but offering other incentives to either keep current tenants or attract new tenants in light of current market conditions. There are 2 major avenues landlords are helping tenants. First, landlords are offering more months or free rent on longer term leases over 5 years than in years past. Typically, in years past 3 - 5 months was the norm, now it could be 5 - 9 months depending on the length of the term on the lease. Free rent in the past was to help tenants recoup part of their improvement costs to their workspace. Now on top of free rent landlords are also delivering custom office buildouts at no cost to the tenant and in many instances offering office furniture as well. Both these costs could be substantial and saves the tenant a good amount of time and hassle.

If a large global recession does occur yes most likely rents would start to decrease but so might incentives from the landlord as well.

Depending on how deep the global recession is, it will certainly impact leasing costs. Of course, the best outcome for landlords and tenants are for a soft financial landing where both parties will benefit from market conditions getting the least impact on their bottom line.