Since the COVID War began two years ago, office occupancy rates, as we have continually detailed in the Trends Journal, have plummeted across America.
But with occupancy rates still down and remote work a 21st century reality, building owners are doing what they can to keep office tenants and find new ones.
In the summer of 2020, Facebook – now Meta Platforms – leased 730,000 square feet of Manhattan office space at $100 a square foot.
Analysts celebrated the deal as an example of New York rents’ ability to remain high during the COVID era and the new normal of remote work.
But landlord Vornado Realty Trust persuaded Facebook to sign the deal by promising to foot the bill for about $200 a square foot in construction and renovations.
Roku, a maker of digital media players, recently inked a lease for 240,000 square feet in midtown Manhattan after securing the landlord’s guarantee to pay up to $30 million in construction and renovations costs and giving 18 to 24 months of free rent.
From New York to San Francisco, office landlords in major U.S. cities are raising rents, but then lavishing freebies on tenants, such as paying their moving costs or the cost of redecorating space, to entice them to sign or extend leases, according to The Wall Street Journal.
On paper, rents go up. In reality, landlords’ net receipts shrink.
Raising rents to keep up appearances while giving away a large slice of the gains is landlords’ latest survival tactic.
In Manhattan, for example, the value of freebies to tenants has more than doubled from $76 a square foot in 2016 to $154 last year, a study by real estate services firm CBRE found.
As a result, nominal rents rose 1.6 percent, while landlords pocketed 7.7 percent less.
Why do landlords do it?
High rental rates increase a building’s value on paper, luring investors in real estate trusts or bundles of mortgage-backed bonds, according to the WSJ.
Still, sophisticated investors are aware of these sweeteners; studies from brokerage houses often report “net effective rent” figures that take the giveaways into account.
“These payouts have long existed to a degree,” the WSJ noted, “but they have never been so big or so commonplace.”
TREND FORECAST: This tactic may keep up appearances but it does nothing to improve landlords’ long-term survival prospects, especially if property tax rates are figured on buildings’ apparent value.
Landlords are giving away money as a short-term gamble that demand for their space will rise again soon enough to put them back in the black before they run out of liquidity.
Some will survive; many are only prolonging their inevitable collapse. We have followed the trials of office landlords throughout the COVID War in “San Francisco Rents Drop Dramatically” (16 Jun 2020), “Sliding Value of Office Space Hits Urban Centers” (11 Aug 2020), and “More Manhattan Office Space Goes Vacant” (8 Jun 2021).