In the wake of the U.S. Federal Reserve’s interest rate cut in September, commercial real estate owners and operators are expecting more favorable conditions in 2025 as shifting patterns of office attendance, rising costs and environmental concerns lead occupiers to reassess their real estate footprints and office space utilization strategies.
Richard Barkham, global chief economist and head of America’s research at CBRE, said the decision to cut the main rate by a half percentage point would support “more than a moderate improvement” in commercial real estate investments. CBRE cited expectations that the economy will ward off a recession and that a soft landing will boost tenants’ confidence, supporting demand for space across property types. economy
While most organizations have landed on a hybrid, three-day per week attendance policy, these requirements are rarely enforced. The rise of remote and hybrid work models has led to an increase in the variability of weekday attendance, according to a recent report from Colliers.
“The companies that have leases expiring over the next several years have the benefit of time. They've been able to figure out over the past three years, ‘What is their new normal for operations?’ Whether it's a hybrid workplace, whether it's still five days in the office, whether it's something in the middle or they've just completely done something different,” said Marianne Skorupski, director of national office research at Colliers.
Growing share of office lease renewals
Office occupiers signed slightly more leases in the first half of 2024 than before the COVID-19 pandemic, with more tenants choosing to renew for less space, according to a Sept. 17 report from CBRE. The number of office leases signed in the first half of this year rose about 0.9% to 3,166 from the average number of office leases signed during the first half of 2018 and 2019. The share of renewals as a proportion of office lease transactions post-pandemic has also increased. Renewals accounted for 42% of office lease transactions in the first half of 2024, compared with 31% of the 2018 and 2019 first half average of 3,136 deals.
“We are starting to see more renewals in place again. Part of that comes into play with the top desired buildings being full or tight, and the availability might not be there,” Skorupski said. “Companies that may want to move may have to sit tight for a little while to wait for availability to open up in those buildings they want to go to.”
Despite the rise in renewals, the average lease size was 27% smaller than before the pandemic, CBRE says. “Economic uncertainty, in conjunction with structurally lower demand due to hybrid work, has softened demand for space,” the firm notes.
The average lease size for new deals decreased 32%, while the average renewal lease size for renewals only shrank 21%. The higher share of lease renewals and reduced downsizing among renewals suggests occupiers are “cautiously leveraging existing landlord relationships while adapting to new work patterns,” CBRE says.
This trend has been partly driven by a preference for renewals among large occupiers, who tend to be more successful in negotiating renewals due to landlords’ unease of sizable vacancies, CBRE says. The firm’s 2024 Americas Occupier Sentiment survey, which polled about 225 corporate real estate executives overseeing office portfolios across the Americas, found that 92% of occupiers with over 10,000 employees were considering or executing a renewal, compared with 80% of overall respondents and 47% of small occupiers with less than 1,000 employees.
Fifty-eight percent of larger companies said they will likely trim their footprint over the next three years, while 80% of smaller companies expect that they will need more space in that time, per the survey.
Leasing activity is expected to increase later this year and into 2025, as an anticipation of lower interest rates and greater clarity around office utilization drives more tenants to seek space in major markets, CBRE says.
Organizations that choose to move are mostly upgrading their space, with 59% of respondents to CBRE’s 2024 occupier sentiment survey considering or executing a relocation to higher-quality space.
Prime vs. non-prime office leasing trends
Between 2021 and 2024, the average lease term for prime buildings was 107 months — about 24.4% greater than the average of 86 months for non-prime buildings. As occupiers work to sign longer lease terms to secure tenant improvement allowances in prime spaces, those in non-prime buildings have used vacancy rates to negotiate more flexible terms and concessions.
“There's this … fork-in-the-road moment happening. It's really based on tenant preferences and the assets, both in suburban locations and urban core locations, that are generally newer, nicer and better capitalized,” said Michael Lirtzman, head of office agency leasing for the U.S. at Colliers. “That's a massive issue today and [it] has continued. The owners that have continued to reinvest in the asset and put in all the bells and whistles that tenants these days want are performing very well today.”
There are also efforts to drive office attendance further to pre-pandemic levels, following Amazon CEO Andy Jassy’s announcement that the company’s employees would return to the office five days a week, starting 2025, according to a message shared with employees in mid-September.
Amazon’s decision to shift further from its existing three-day-per-week in-office mandate comes as the tech, legal and finance sectors drive demand for prime office space. Thirty-four percent of legal sector leasing since 2021 was in prime buildings, followed by 16% of both tech and finance sector leasing, CBRE says.
“I’m really curious to see — In the wake of Amazon’s announcement, where do other groups in the tech sector go? [Those] who didn’t want to be first. Because tech generally has been one of the most remote, work-friendly sectors. They haven’t been that aggressive with pushing their employees back to the office.” Lirtzman said.
“And you look at financial services in particular, but also legal, which drives a lot of downtown high-rise [central business districts], that have also been a bit more progressive, if you will, on getting people back into the office. We live in a copycat society, so it’ll be really interesting to see how that evolves in the fourth quarter and into the first quarter,” Lirtzman added. “I’m cautiously optimistic that we’re starting to get past the bottom and see things turn the corner. But we need those macro factors to get in line and get past some of the uncertainty of the fourth quarter right now.”
