Inflation Getting into the Heads of Corporate RE Decision-Makers

The high-inflationary environment is getting into the heads of corporate real estate, according to a new survey conducted by CoreNet Global.

It is affecting 62% of respondents in decision making and more than half (54%) are consolidating locations; 42% are reducing the size of leases they are signing; 41% are looking for cost-effective buildings and lower rents.

Meanwhile, nearly 60 percent say that their company is in growth mode, however, 75 percent expect the U.S. economy to slip into recession by year’s end and 72 percent expect the global economy to be in a recession by the end of 2023.

The survey was conducted from June through September 2022 and yielded 175 responses from North America, Europe, Asia and the Middle East.

Trying to ‘Understand the Market’

Compared to pre-pandemic, their overall corporate real estate footprint has decreased for 44% of respondents; 21 percent say that it has increased, and 34 percent say that it is unchanged.

Between now and 2025, 39 percent expect an increase in the size of their corporate real estate portfolio; 42 percent expect a decrease, and 19 percent say that it isn’t expected to change.

Ryan Caffyn-Parsons CEO, Americas at Unispace, tells GlobeSt.com that tenants in the market continue to evaluate their options whenever possible as the post-pandemic woes, rising inflation and looming recession continue to fuel uncertainty.

Caffyn-Parsons said his clients fall into three camps: expiring leases in 18 to 22 months; tenants looking to sublease and reduce RE footprint; and those that are expanding.

“In all instances, clients are seeking ways to understand the market, the impact of rising inflation, future occupancy levels and work trends,” he said. “Wherever possible the preference is to delay inking a long-term lease and delay decisions.

“We continue to see clients opting for 1- to 2-year lease extensions and hold off on implementing workplace strategies or considerations on new test-fit plans. While rent pricing remains competitive the rising inflation and supply chain issues continue to rage on, which materially impacts the tenant build-out cost. Contractors have been squeezed with absorbing rising construction costs over the past 18 months, however recently this shifted and caused a significant increase in cost being passed to owners.

“For projects that have not been awarded or started, owners should first set realistic expectations about current costs and the likelihood of increases. As a design-and-build specialist, our clients get budget estimates at every design document milestone, which provides an accurate and transparent approach that minimizes the likelihood of unpleasant surprises for either party.”

Companies Focused on Depth Discovery More Sq Ft

Petra Durnin, head of market analytics at Raise Commercial Real Estate, tells GlobeSt.com that companies are adjusting their space needs to determine the best fit for their employees to collaborate in the most ideal environment.

“Though every company may not be adopting a complete hybrid workplace strategy, 100% of them are evaluating how they use office space,” Durnin said.

“Long-held standards, like the use of roughly 175 square feet per employee to determine needed office space, are being replaced by more in-depth discovery and visioning phases. One size does not fit all and a unique approach and solution is a longer play. Companies are seeking higher quality spaces across more metros in an effort to meet talent where it is and provide a reason for meaningful, in-person connections.

“Companies are also looking at cost-saving initiatives, which include their real estate portfolio. Aside from the limited discounted subleases on the market, there are a few low-priced options. To offset higher face rents, landlords are offering concession packages that could include free rent and tenant improvement dollars to help reduce the overall costs for the tenant.”

Flexibility and Autonomy Strongly Considered

Edie Weintraub, managing director, terra alma, tells GlobeSt.com that companies anticipating inflation are planning for smaller spaces, more flexible lease terms (shorter terms) and more satellite offices vs. a single large space.

“These changes are not only a cause of inflation but also a post-COVID workplace environment,” Weintraub said. “Beyond economic conditions, employees are pushing for flexibility and autonomy, which employers are also taking into consideration.”

She said that the biggest questions remain: how do companies continue to build culture, and collaboration and offer mentorship while balancing work from home and office footprints.

A Migration to the ‘New’

David B. Yelin, head of Duane Morris’ Chicago office’s real estate practice tells GlobeSt.com, “We are seeing tenants migrating to the newer, Class AA, technology-enabled ‘smart’ buildings that are much more cost-effective and where demand for office space remains strong, and the older, Class B buildings are losing tenants and becoming empty.

“Even some newly renovated buildings in Chicago that have had significant capital investment are less attractive than newer buildings, because of the inefficiency of the space.

“I have seen many corporations (both Fortune 500 and smaller) rein in their capital spend plans this year compared to those that have been very robust for the last couple of years across all real estate sectors, including office, manufacturing and retail.”

Shared Space Memberships at All-Time High

For tenants faced with inflationary and economic concerns, there has been an increased demand for shared space, according to Doug Ressler of Yardi’s CommercialEdge.

“During its second-quarter earnings call, WeWork reported its occupancy rate had risen to 72% for that quarter, equal to the pre-pandemic rate Q4 2019,” Ressler said. “Additionally, memberships for the coworking company grew 33% year-over-year and are now at an all-time high.”