Historically High Concession Packages Help Spur Long-Term Leases

Occupiers are shifting back to long-term leases as their space needs take shape and they look to take advantage of the tenant-favorable market conditions, which include high availability rates, reduced rents and historically high concession packages. 

The recovery of the average lease term length in the Manhattan office market is another welcome sign that conditions are normalizing as the Covid pandemic recedes. 

The Manhattan office availability rate in January 2022 is near an all-time high of 19.2%, while average net effective rent is down 27.6% since year-end 2019. 

Widespread occupier uncertainty—regarding both the economy and also the impact of remote work on space needs—caused leasing volume to drop significantly in 2020. Some tenants, facing imminent lease expirations, were forced to transact amid the uncertainty, and many opted for short-term leases. 

As a result, in 2020 average term lengths for deals of all sizes dropped to 6.7 years, down 15% from 7.9 years in 2019.

Going from Short-Term to Long-Term Leases

According to recent CBRE indices tracking leasing activity across the 12 largest US office markets, cities that had been making progress in leasing maintained the status quo in January while those who had struggled continued to do so. 

CBRE’s US tenant in the market index ticked up to 89, up three points over December’s numbers, with Houston, Boston and Denver all exceeding pre-pandemic levels. In addition, Dallas-Fort Worth, Seattle, Chicago and Manhattan all hit 90% or more of their pre-pandemic numbers.

As many occupiers began to experience employee growth and develop consensus on their space needs by mid-year 2021, leasing volume started to rebound. Tenants turned away from short-term renewals in favor of longer-term leases, resulting in an increase in 2021’s average lease term length to 7.0 years.

Looking at early 2022 data, average term length has grown to 7.7 years, signaling continued reversion back to pre-pandemic terms. 

Eager to Sign the ‘Big Fish’

The shift back to longer-term leases was especially notable among occupiers with larger requirements. During 2020, average term length among large occupiers 50,000 sq. ft. and over dropped more than 28% to 9.1 years. 

In 2021, the average recovered to 12.4 years. These “big fish” are the tenants that landlords are most eager to land and consequently can maximize savings by signing for longer terms. In contrast to the transaction of larger occupiers, the pandemic shift to shorter-term leases was less notable for those occupiers with requirements of 10,000 sq. ft or less. 

These smaller occupiers, who traditionally signed shorter-term leases even before the pandemic, saw only a modest change in their average terms from 5.8 years in 2019 to 5.3 years in 2020, and a modest uptick in 2021 to an average of 5.4 years.

Finding an Uptick in Flex Space

While the average lease term length shows occupiers’ clear shift back toward longer term leases, it does not tell the entire story. Even as more long-term leases were signed in 2021, there was also an uptick in occupiers taking flex space. 

While no comprehensive data on the volume of Manhattan flex space commitments last year exists, anecdotal evidence from occupiers and flex space providers indicates a strong increase in the shorter-term, easily-scalable offerings that flex space provides. 

As detailed in a recent CBRE Flex Space report, a new “core plus flex” model is emerging, where occupiers make long-term lease commitments for a portion of their footprint when space needs are more certain, while taking on flex space to accommodate the more fluid and/or less predictable part of their business operation. 

The core plus flex approach is expected to grow as a preferred solution for many occupiers as the market recovery continues.