Was 2021 a ‘dead cat’s bounce’ for the traditional office leasing market?

Was 2021 a ‘dead cat’s bounce’ for traditional office leasing? (Google it…lol I had to the first time I heard it!)

Funny enough, on November 5th, 2021 I put out a cheeky?LinkedIn post?where I posed this question but now I want to dive in a bit further…

In my anecdotal experience ‘traditional’ is slowing down again. And what I mean by traditional is a medium/long-term office lease that more often than not doesn’t align with business objectives and also has no added services/hospitality component.

*Longer term I’ve even gone as far as saying it’s on?LIFE SUPPORT!?but that’s a topic for another article :)*

What’s interesting however, is that I have also noticed another trend running parallel to the lull in traditional demand; which is the?explosive interest?that is resurfacing within the flex/coworking sector. But again, perhaps a topic for another article (and maybe I can co-author with one of the best in the flex biz,?Ben Wright!).

But for now, let’s focus in on the ‘traditional’ market by sharing some real life examples:

Last summer my team and I completed 3 of the largest sublease transactions in downtown Toronto.

One company is expected to downsize (I say expected because they have a sizable chunk of space on the sublet market with a 2024 lease expiry so as a betting man, I’m betting that they dump this office) from 68k sq. ft. into a beautiful, newly built out 28k floor.

Another company relocated to our other floor in the same building and kept their square footage flat at about 28k. This business uses an office for specialized purposes so I suspect this is at least part of the reason for keeping their square footage flat regardless of daily usage for ‘non-specialty’ staff very likely reducing like every other company…because even the patriarchy itself, US Banking is partially?falling from grace!

And another client we had wanted to downsize from 64k sq. ft. to 32k for obvious reasons, and in fact, a senior exec actually had this to say to me on on the phone about it: “going forward, we are going to be seeking a variable cost structure from our real estate. The commercial real estate industry is going to have to figure out how to offer that at scale”. Luckily, we were able to source a company last summer who took the entire 32k off their hands but now has 16k sq. ft. on the sublet market! There are likely various reasons for this but one has got to be that they’ve bit off more space than their employees want to “chew”…

We also have A LOT more sublet space on the market with other clients and the activity on these opportunities has gone down significantly since last summer. It’s not gone, but it’s way down and either way, what’s most telling to me is the fact that the urgency just isn’t there anymore to get a deal done like it was last summer.

And independent of my own team’s leasing volumes, one other sublease coming to market strikes me as odd:

A company that I’ll keep confidential for the purposes of this post leased 27k sq. ft. in late 2019, built it out brand spanking new, left it OFF the sublet market for the whole pandemic but now, right as restrictions are lifting have put the entire space on the sublet market. This is a strange time to want to shed that much space…isn’t it “back to work!!!” time?

There are also lots more?hints?from convos I’m having with CEOs/senior execs that indicate grey/black clouds are on the horizon for the office sector…

So what do I think WAS going on and what do I think is going on NOW?

Last summer there was a lot of optimism around the pandemic subsiding and strong convictions from many CEOs surrounding return-to-office mandates, albeit with reduced daily attendance. This naturally led to companies that had a near term office need to transact on the best quality sublease spaces in the market that had previously not been available due to such low vacancy rates in cities like Toronto.

But as we seemingly (at least mentally) leave Omicron behind us and embark on this next summer, sentiments appear to be different, at least in my anecdotal real time experience and from the convos I’m having with other industry folks I trust/respect.

Why could this be?

I’m guessing that it’s because the employees who actually want to be back at the office have returned and the ones who don’t in many cases haven’t (at least per the schedule that their employer is expecting)…

Kastle Systems swipe card data still has occupancy levels hovering at?+/- 40%, which by the way is only about 20% of true occupancy because it was only averaging +/- 50% pre-covid. And while these pandemic induced lows are likely to rise because of continual pressure from large employers, it’s pretty clear that only about 20% of folks actually want to be there on a regular schedule by choice (I think this number is actually lower than 20% but let’s just go off the high level data because it’s still quite illuminating!).

We then also have to ask ourselves how we even measure occupancy anymore when considering the fact that there will now be a slash in the number of in-office days for the entire knowledge working economy coupled with the reality that people’s movements in/out of HQ stand to be far more ‘fluid’ as flexibility migrates (because it’s a migration!) from a privilege to a right enjoyed by ALL (at least that’s the ‘word on the street’!).

Additionally, there doesn’t seem to be a day that goes by without a?story in the news?pertaining to talent problems companies are facing because of a forced approach to returning to the office. Of course we can argue that certain employee ‘archtypes’ resembling an introvert are leading this revolt or that there is a line-up of people waiting to fill these seats (at the OFFICE!); so because of all of this CEOs are ready to ‘pull the trigger’…

But that would be tone deaf and also not true in more cases than we are perhaps considering.

Last thing on this…while a major recession stands to turn the job market in an employer’s favour, I still say whatever the reasons we can come up with in the short term that support a reversion to the mean, we still equally have to follow the?Mega Trends?and realize that social movements around inclusion/equality and the climate crisis are likely to continue to force the remote work agenda for the foreseeable future.

Last, last thing on this (!), none of this even considers the many smaller companies who remain on the sidelines.

The ones who haven’t grown their office footprint in between the natural expiry of their lease (like so many did pre-pandemic…), the ones who are still seeking short-term renewals (often commenting that they want to downsize), and the ones who are turning to the flex office sector to give them the much needed business vs. lease length alignment they will NEED now and into the future.

When considering all of this…

Does it at least feel somewhat logical to think that traditional office leasing over the medium term won’t necessarily return to the HOT, HOT, HOT levels it experienced between 2015–2021 anytime soon?

Something else remember is that leasing activity doesn’t always directly equate to present day happenings. I?wrote?about this and included some supporting content in a recent article where I challenged a few of?Chris Herd’s predictions on remote work for the next few years.

I don’t say this to be unnecessarily dark as I see SO MUCH opportunity amidst this shit storm but I think it’s important to poke around at things and ask ourselves “if it walks like a duck and quacks like a duck…is it a duck?”

Of course it might be, it also might not but personally, I’d rather be poking around to find out if it’s a duck so I don’t get f-cked (lol).

What do you think of all of this? Lol, feel free to pause and take stalk because I know I need to before I keep writing!

Personally, I think demand for conventional, medium/long term office leases is going to continue to slide throughout the remainder of this decade which is going to lead to a bifurcation in demand in favour of Space-as-a-Service (landlords are going to meaningfully get into this business — some already are but to be successful the right intentions have to be there — it can’t just be about plugging vacancy holes).

Because at the end of the day, it feels like any rational company will NEVER carry the same amount of office space per employee again and because in many cases their people don’t NEED an office to be productive there is going to be a lot more pressure on the supply side of the CRE industry to deliver the office across a network (how it’s actually needed) and to become a lot more experiential with product that requires a commute to get to.

Ok that’s the end of my anecdotal findings but to finish off this thought exercise just IMAGINE…

Imagine a future where you could tap into a productive workspace as seamlessly as you can listen to a song on Spotify and when you’re feeling ‘frisky’, book an experience at company HQ that resembles your experience of going to a great hotel.

The ‘office in your pocket’ part feels easy to envision because we already have so much in our pockets but when you envision your HQ ‘hotel’ experience remember that because you don’t go to hotels all the time you’ll need consider how you’d to plan around this journey to ENSURE that you get the most out of this precious time and are present for the experiences that you can’t match at home.

When you imagine all of this, is it a future that gets you excited? Because it is for me…!

And guess what…this future doesn’t require 2019 sq. ft. per person office leasing metrics (150–180 sq. ft. per/pp) but it sure does need some reinvention!