Developers, building owners and brokers alike have been nervously awaiting the potential fallout and impact on future leasing activities as employees finally return to traditional and more normalized workplaces in a post-pandemic world, and companies reassess their future space needs.
Early reports have been promising as remote-only and hybrid work arrangements have largely not influenced real estate decisions, but the volume of sub-leased space available and the prospects of a looming economic downturn have raised additional questions and created more opportunities to worry.
Offering their perspectives concerning what the future holds for the commercial office sector in Baltimore City and throughout the surrounding counties are Matt Lenihan, Senior Vice President – Leasing, St. John Properties; Joe Nolan, Principal, NAI KLNB and Ashley Reimer, Leasing, Merritt Properties.
Negotiating lower rates, shorter lease terms
Joe Nolan (JN): “Many companies think they are in the driver’s seat when negotiating a new lease or lease renewal because they detect market softness, but that is not always the situation, particularly with Baltimore City waterfront properties. We recently worked with a company looking to downsize from 16,000 to 5,000 square feet of space with two years remaining on the lease and, in turn, was willing to sign a longer-term lease. We encouraged the group to market their existing space for sublease and if a prospective tenant surfaces, we would work to make a sensible deal for all parties.
Ashley Reimer (AR): “In terms of companies looking for reduced or additional space, we are seeing a mixed-bag across all industry sectors, but leasing conversations are definitely starting sooner, with many looking for lower rental rates. We are seeing some companies testing the market with smaller office spaces and asking for shorter terms. This is driven mostly by the uncertainty of their employees and willingness to commit to returning to an office setting. Other companies are holding at their current square footage, with their employees coming back to the office on set days only. We are finding with organizations placing an increased emphasis on maintaining a corporate culture and foster employee collaboration, this method can allow for a more work-life balance.”
Matt Lenihan (ML): “The remaining term of the lease is driving negotiations and, for those with only limited lease term left, landlords are looking to right-size the tenant and secure a longer-term lease as opposed to risk riding out the lease and allowing the tenant to shop the market. As long as the tenant improvement package isn’t exorbitant, these deals are getting done quickly. As for tenants expanding or downsizing, the office environment is changing but is not necessarily resulting in a net decrease in space. Certain companies now have fewer employees in the office, but want larger spaces for those that remain. For example, six-foot by six-foot work stations are being expanded to eight-foot by eight-foot along with some new collaboration areas providing additional breathing room, and the net result may be the same footprint to support half as many employees in the office. The flight to quality trend is very real within older office products, especially those lacking newer amenities and not contained within vibrant business communities.”
Suburbs still out-pacing downtown markets
JN: “When looking at Baltimore City, it is important to differentiate between the Central Business District and waterfront properties because conditions are dramatically different. When COVID hit, employees fled most downtown areas and worked from home, with many still not returning. Companies are still dealing with large amounts of unused space and there is an estimated 2 million square feet of sublease space available in the CBD. That is not likely to change in the immediate future. The story is different for waterfront projects such as McHenry Row and Port Covington, which is starting to reel in tenants. In addition, The Collective at Canton is Maryland’s first all-timber wood project that is 50% preleased and due to deliver this spring.”
AR: “We have two downtown buildings, and we are detecting some tenants jumping to the suburbs. Reasons for the shift include the need for larger floorplates and a less-dense environment. The surge in healthcare and medical users has heightened the need for medical office buildings and we see that segment only growing in the years ahead.”
ML: “The hub-and-spoke model, in which downtown companies open satellite offices near where its employees live in the suburbs, is very real. After working from home for several months, employees crave shorter commutes, walkable amenities and outdoor spaces to unwind or even work from to change the pace. Rents in the suburbs are substantially lower and parking is free and plentiful. All these factors are major drivers in real estate decisions.”
JN: “Live, work, play environments has become a trite saying, but that is the reality in today’s post-COVID world. Young people don’t want to go back to the same boring office and employers need to deal with that reality. Many companies are willing to pay premium rents to obtain that ‘vibe’ which can help recruit and retain employees. Having residential nearby, or part of the project itself, is a game-changer.”
AR: “Yes, employers and employees want amenities. Employers are looking for spaces and activities that will lure their employees back into the office and employees are looking for close-by amenities that can allow them to accomplish day-to-day tasks. They may also want places in the building they can go outside of the workspace to lounge and work. We recently reconfigured one of our Hunt Valley buildings to incorporate a community gathering room and a micro market to instill a hotel-like feel. Employees want things that are cool, fun and something different.”
ML: “Our large mixed-use communities such as Greenleigh, Melford Town Center and Maple Lawn are thriving because they incorporate a full range of walkable amenities in a true live, work, play environment. Many tenants want to be part of a community that has energy as opposed to locating in a one-off office building without any nearby amenities for their employees. We try to shape the designs of our new buildings and parks to meet the evolving requirements of our clients. Providing LEED-certified ‘green’ buildings was not a topic we addressed often in the past, but now it is a conversation starter.”
2023 leasing activity
JN: “It will be important to bring rising interest rates and inflation under control and, more importantly, we are detecting uncertainty about the future among business owners. That tends to elongate decisions and make executives increasingly tentative.”
AR: “We are bracing for, but not necessarily expecting a leasing slowdown next year. The Baltimore-Washington, D.C. market has always proven to be extremely resilient across all real estate cycles and believe any dip to be shallow and short-lived.”
ML: “Leasing activity over the past two years has been so strong that it will be difficult to keep the pace for the coming year. But we remain optimistic for the continuation of a vibrant leasing environment.”