NYC Office Lease Fact or Fiction: Here’s What You Should Know
Where do you get your news from? Don’t worry, this isn’t a pop quiz to see if you’re consuming “fake news”. The reality is that no matter what you hear, it’s hard to know exactly what to believe these days. That’s especially true in a spectator sport like commercial real estate where there’s just as much clickbait and misinformation as there is helpful data and shared insights — it’s hard to know what’s fact and what’s fiction when it comes to your NYC office lease.
We’re here to answer some of the most common questions we get from clients and NYC tenants about their NYC office leases with straight facts, no fiction.
“What can I expect to pay for my NYC office lease right now? Can I still expect COVID-19 discounts?”
The market volatility in the last 18 months has left many decision makers wondering when and where the market will bottom out, and what discounts they can expect on their NYC office lease. In the heart of the pandemic, we were seeing 20% discounts on face rents and nearly double the typical free rent and tenant improvement allowance given by landlords on direct space, and upwards of 40% discounts on face rents for sublease space — those opportunities are now few and far between (unless you’re talking about a short term sublease). The discounts and concessions we can ultimately negotiate depends on:
The type of office space you’re looking for: direct space or sublease space, Class A building vs. Class C building, a beautiful brand new pre-build vs. a second generation space that’s been sitting on the market for months
The type of landlord your space belongs to: a smaller scale landlord who is more likely to need cash now vs. waiting for the market to fully return to pre-pandemic levels
The length of the office lease you’re signing: the longer the office lease, the more willing the landlord will be to be flexible with face rent, free rent and concessions offered. If you’re looking to sign a term less than 5 years, you’re going to pay a face rent closer to ask and receive fewer months of free rent than if you sign a lease for 5 years or longer. A landlord likely will not build to your specifications for a term under 5 years, even in this COVID-19 market.
Here’s another fact: The best value on the market continues to be top tier subleases. Subleases are the first place we recommend looking for most clients, whether they’re looking for short term space, longer term deals or anything in between; they’re steeply discounted, they’re furnished wired and ready to go, and with 20 million sf of sublease space on the market, chances are good that the “right one” for your space needs is out there. But how do you actually get the right one? If you’re looking for a beautifully built, top tier space from a Fortune 500 company with a long term, you’re not alone. We’re seeing a massive “flight to quality” driving intense competition for these subleases. This means that the most beautiful, fully furnished and wired sublease spaces are priced competitively and are leasing quickly. It doesn’t mean you can’t negotiate, it just means you may not get the same “steep” discount you’d expect in a pandemic market (and they’re still 20%+ less expensive than direct space).
With that said, if you’re looking for interim or short term space, short term subleases offer the steepest discounts you’ll see in this market (think up to 50% discounts on base rent). The companies subleasing these spaces have essentially written these spaces off given the probability of renting that specific space when there are over 20 million square feet of sublease space available on the market — so they are willing to offer deep discounts to make a deal that is “found money” for them.
Note: no matter where your deal lands, it’s important to budget appropriately (See our budgeting article for reference).
“How many months of free rent can I expect on a new or renewed NYC office lease?”
Free rent is a common concession in any NYC office lease, and means you won’t pay rent for the first months of your lease. The amount of months you can expect your broker to negotiate depends on a few factors:
the landlord: some landlords want to keep the face rents in their building high, so they will offer more free rent in order to compensate. The less flexibility in face rent, the more likely your broker can leverage more free rent for you.
A great way to leverage the lingering Covid market to your advantage is to sign a long term office lease so the landlord is willing to tack on more months of free rent. As of late, we’re seeing landlords give 4-6 months of free rent on 5+ year leases, with some landlords giving upwards of 8-12 months if the taking rent on the space is high. Even though your face rent might be closer to what they’re asking for the space, having free rent will help you stay within your budget. Most times, tenants will use their free rent at the front of their term to avoid paying rent at the beginning of their lease. But either way, it’s a commodity that landlords are willing to give away and serves you well.
“On a direct office lease, can I expect the landlord to build my space to my specifications? Do I need to engage an architect if the landlord is building the space?”
In this market, landlords are willing now more than ever to build to suit so long as it means they are filling space (to an extent). More often than not, we are able to negotiate with landlords to build out direct space for tenants on their dime, provided the space is a fairly standard build and will be marketable in the future should the tenant choose to vacate the space at the end of their office lease. But, occasionally landlords will put a capped dollar amount on the work they will do, which will then become the tenants responsibility to pay if the cost of work exceeds that limit.
As we mentioned above, sublease spaces allow you to take “plug and play” space, meaning space that is fully built, furnished and wired. Depending on your other options, this can save you time and money.
“We don’t need our existing space anymore, I want to terminate our office lease, what can I do?”
The short answer is yes, and here’s how. Each scenario and space is different, but they all have one common theme: it’s a math problem. We’ve successfully negotiated hundreds of these during the pandemic and are happy to share what we’ve done as it relates to your specific scenario. We’ve seen the full spectrum of responses to proposed lease terminations, but the truth is most landlords want to avoid the time, cost and hassle of the courts and are willing to engage in a conversation and solution that allows you as the tenant to pay a fraction of your remaining lease obligation.
“Is the NYC office leasing market actually coming back?”
The short answer is yes. After hitting a 30 year high of 18.6% vacancy, the city is finally starting to see some resilience as companies transition back into the office, either in a full time or hybrid capacity. This isn’t a complete comeback to pre-pandemic levels, but leasing activity last quarter was the highest we’ve seen all pandemic as The Real Deal reports that about three-quarters of residents who left during the pandemic have since returned to the city or have been replaced, which directly relates to employees coming back to work.
The Takeaway:
There are so many variables when it comes to today’s office market, it’s important to have a general idea of what to expect when exploring your office space options. Whether you’re looking for sublease, direct, or coworking office space in NYC, you want to be educated on how to get the best bang for your buck in order to protect your bottom line.
How We Can Help:
Outside of the data, the best marker we have available is our own experience with NYC tenants and clients right now. We’re busier now than we were pre-pandemic, and spending our time equally between helping our clients find and negotiate office space and helping our clients get out of or renegotiate their office lease. We’re happy to share insights on what we’re seeing and successfully solving for in either case – the bottom line is the market is moving as companies continue to solve for their “post-COVID-19” office space needs. Our job is to make sure you as the decision maker have the information you need to make the smartest strategic decision for your business.
Contact us:
Have other questions? We’re here to help. We may not be as cool as the guys on Mythbusters, but we know our market, and will answer any questions you may have to help you make educated and informed decisions as you plan to take new space or leave your current space. Please reach out to me at brosenblatt@vicuspartners.com, or give me a call on my cell phone (917) 862-8820.