Office lease terms getting longer after wave of short-term renewals during Covid — but flexibility still key

Office lease terms getting longer after wave of short-term renewals during Covid — but flexibility still key

Most office leasing activity since the Covid-19 pandemic has been renewals and short-term extensions as companies took a wait-and-see approach about the future of their space needs.

In mid-2021, many companies are still not totally sure what their space requirements will look like, with “hybrid” the new buzzword.

“The situation is improving but we’re still not back to normal,” said Phil Ryan, U.S. office research director at JLL.

But those tracking the office industry report an uptick in longer-term deals being signed.

Nationally, the average lease signed in the second quarter of 2021 had 7.4 years of term, an increase from 7.1 years in Q1 2021 and 6.7 years at the end of 2020, Ryan said. In Q1 2020, average term length was 8.9 years.

In the New York metro — historically a market with longer leases — renewals averaged 9.9 years in term length in 2019, compared to 6.8 years in 2020 and, year-to-date, 7.9 years, according to CBRE research. New deals and expansions have gotten shorter year over year — averaging 11.8 years in 2019, 11 years in 2020 and, so far, 10.4 years in 2021.

Between April and December 2020, 54% of renewals in New York that were larger than 15,000 square feet had lease terms of five years or less, CBRE found. Even some large Manhattan leases signed last year — NBCUniversal’s 340,000-square-foot renewal and Stroock & Stroock & Lavan’s 191,000-square-feet deal — were short term.

So far in 2021, the proportion of short-term renewals in the New York market has been reduced to 32%.

“We saw a fair amount of deals (last year) between three to five years, but brokers kept saying (tenants) were kicking the can to two to three years down the road,” said Nicole LaRusso, director of research and analysis for the New York Tri-State region at CBRE.

Short-term deals signed during the pandemic will create somewhat of a surge in expirations in New York — as well as other cities — in the coming years, especially 2023. LaRusso said, by that time, there’s expected to be more momentum in the overall economy.

In June, CBRE was tracking 90 active office tenants, each seeking 50,000 square feet or more, in Manhattan. In April 2020, there were only 17 such tenants in the market — down from 133 a month prior.

It’s not certain whether lease term averages will ever return to pre-pandemic levels. The market today remains tenant-favorable, and flexibility — including term length — is key in negotiating renewals, expansions or new deals. Plus, LaRusso said, tenants today have more of an opportunity to split their footprint among traditional leases, subleases or space with a third-party operator, such as a coworking office.

If tenants are signing on for 10 years or longer today, they’ll frequently be looking for things like rent discounts or the ability to terminate a lease early with fewer penalties, Ryan said.