Many commercial real estate professionals have wanted to know when business would return to normal. But the problem with questions is the answers you can get. According to a new report from lease accounting software vendor LeaseQuery, the new normal may be previous levels of leases being signed but at post-pandemic prices.
The data comes from an analysis of “more than 2,000 companies’ lease liabilities,” which needs a caveat because there is no telling how many actual leases that covers or whether the businesses are nationally representative. Also, leases can be for equipment, not just buildings and land.
At the same time, perfect information in business is rare and often you must work with what you can get.
“Across most organization types … the average number of leases has returned to or exceeded pre-pandemic levels—signaling impressive resilience in the face of unprecedented challenges,” the report notes.
However, this is news that property owners, operators, and investors will need to manage around, because there’s a big caveat.
“Headlines around the death of the office or storefront have been greatly exaggerated,” Vice President of Accounting Jennifer Booth said in prepared remarks. “But with hundreds of million square feet of office space expiring this year, we are only in the early days of the great reshuffle. As companies consider their footprint for the future, they will do so with new priorities of flexibility and diversification, but most will not disappear from the map altogether.”
Or, as the report says, “Lease-type trends make clear that the headlines around the death of the office or storefront are greatly exaggerated…for now.”
In other words, leasing levels are more likely back to pre-pandemic levels at the moment, not necessarily going forward, and much might depend on what rebalancing happens in the market. About 11% of office space leasing comes up for renewal in 2022 says LeaseQuery, quoting figures from JLL.
There may be a growth in leases as companies decide to stray from owning property as a way of gaining more flexibility going forward. There are some sectors—banking (+23%), energy (+51%), financial services (+27%), healthcare (+32%), higher education (+92%), professional services (+22%), and restaurants (+65%)—that are expanding their building leasing.
Others—logistics and transportation (-10%), manufacturing (-12%), and retail (-11%)—that are either flat or dropping leases.
It might be that categories from one take space from the other, but that may be wishful thinking. The facility needs in banking, financial service, and so forth can be significantly different from the categories shedding leases.
In terms of pricing, many companies face high levels of inflation and reconsideration of how much space they truly need versus using more flex and work-from-home solutions. That gives them motivation to negotiate hard or look for cheaper replacement space.
Plus, as the report reminds, new accounting rules go into place that will push leasing obligations onto balance sheets where once they were off. According to LeaseQuery, that can mean a 21% of lease liabilities hitting balance sheets, something that executives, and investors, will be loath to see.